January 14, 1987

EonorableLloyd Criss Chairman Labor and EmploymentCommittee Texas Eouse of Representatives P. 0. Box 2910 Austin, Texas 70769 OpinionNo. 34-620

Re: Authority of the Texas Employment Commission to find that a corporatereorganization
was invalid for the purpose of securing a new tax classification

Dear RepresentativeCriss:

You ask us two questions regarding the authority of the Texas Employment Commission [hereinafter the Commissionl to tax employers under article 5221b-5, V.T.C.S. You present us with the following hypotheticalexample to illustrateyour concerns:

The ABC Corporation, a business fulfilling the qualifications for 'employer' as defined in section (f) of article 5221b-17, V.T.C.S.. has been in existence for a number of years, during which it has had a substantial number of employees. Because of the experience rating program required by section (c) of article 5221b-5, the ABC Corporation has been forced to pay t.axes

on its employees at a rate considerably in excess of the 2.7% levied by section (b) on 'newemployers.' The corporationmight reorganize and change its name to the A-to-Z Corporation or the 7X.7,

Corporation. [Inany event]a new business might be created to contract to provide employees for the ABC Corporation. In either case the employees might be the same as those previously working for the ABC Corporation, but either the reorganized A-to-Z Corporation or the ZTZ Corporation might seek to qualify for the 2.7% rate applicable tonew employers.

In thatregardyou ask:

Does the Texas Employment Commission have the authority to find that the reorganization of the ABC Corporation or the creation of the ZYZ Corporation,touse thehypotheticalexample cited

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above,was a subterfuge to secure a lower tax rate and, on the basis of that finding, to require the surviving corporation or the new employing corporation to continue payment at the rates previously imposedon theABC Corporation?

The legislature has delegated, with reasonable standards, power to the Commission to administer the Unemployment Compensation Act [hereinafterthe Act] and to carry out its legislative purpose. See V.T.C.S. art. 5221b-9, et seq.; see also State, ex rel. v. Texas Municipal Power Agency, 565 S.W.2d 258 (Tex.Civ. App. - Bouston [lst Dist.] 1978,no writ). Article 5221b-5,V.T.C.S., provides standards by which theConmcissionis to establish the rate of contributiontobe paid by employers as defined in section (f) of article 5221b-17, V.T.C.S. The Texas Court of CivilAppealshas held that the statutory standards for establishinn rates aremandatory and exclusive. and the Commission is "powerless-to arrive at a different rate.." See Space PrecisionMachining Co. v. State, 503 S.W.2d 289. 291 (Tax.s. App.

- Austin 1973, no writ). This construction is consistent with the rule that when the legislature acts with respect to a particular matter, the administrative agency may not so act with respect to the matter as to nullifv the lenislature'saction. even though thematter is within the ageky’s g&era1 regulatory-field. See State v. Jackson, 376 S.W.2d 341 (Tex. 1964); see also Marti. v. Texas Employment Comrmission,570 S.W.2d 28 (Tex.Civ. App. - Corpus Christ1 1978, no writ). We therefore consider your hypothetical example in the light of theseprinciples.

IfABC Corporationreorganizesand changes itsname to theA to Z Corporation, there is no authority, expressed or implied, for the Commission, sua sponte, to determine that the newly formed A to Z Corporation may be taxed at ABC Corporation's experience rate. The only authority the Commission has to continue to charge ABC Corporation's tax rate to A to Z Corporation is under section (c)(7) of article 5231b-5, V.T.C.S. Section (c)(7) of article 522113-5, V.T.C.S., provides inpart:

If an employing unit acquires all or a part of the organization. trade or business of an employer, such acquiring successor employing unit and such predecessor employer may jointly make written application to the Commission for that compensation experience of such predecessor employer which is attributable to the organisation. trade or business or the part thereof acquired to be treated as compensation experience of such successor employing unit. The Commission shall approve such application if

. . . . (Emphasisadded).

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If ABC Corporationand A to Z Corporationdo not apply for a transfer of experience, the Cormeission does not have the authority to tax A to Z Corporation at the prior experience rate of ABC Corporation. See Tiffany Stone & Brick Co. v. State, 588 S.W.2d 607 (Tex.Civ. AppF Austin 1979, no writ); see also White v. State, 197 S.W.2d 389. 392 (Tex.Civ.App. - Austin 1946,writ ref'dn.r.e.).

Moreover, ABC Corporation is entitled to be taxed at the initial rateof 2.7%under section (b)of article 5221b-5,V.T.C.S..until the corporation, a new employer under the act, has had at least four calendar quarters of compensation experience. See Space Precision Machining Co. v. State, 503 S.W.Zd 289. As indicated in your hypothetical example, "employer" is defined in section (f) of article 5221b-17, V.T;C.S. A-to Z Corporation is made subject to the act under section (f)(2)of article 5221b-17,V.T.C.S..which provides:

(2) Any individual or employing unit which acquired the organization, trade. or business, or substantially all of the assets thereof, of anotherwhich at the time of such acquisitionwas an employer subjectto thisAct.

. .~. Accordingly,we believe that the Commissionhas no authority to find that ABC Corporation reorganized and changed its name to A to Z Corporationto securea lower tax rate.

In regard to the secondhypotheticalexamplewhereinABC Corporation remains in existence and XPZ Corporation is organized and provides employees for ABC Corporation,-we conclude that, for the
reasons previously discussed, the Cormnissiondoes not have the authorityto tax ZTZ Corporationat the rate it taxedABC Corporation. A corporation contracting employment services for another corporation does not succeed to the experienceratio of the corporation receiving the service unless the two corporations apply for a transfer of experience under section (c)(7) of article 5221b-5, V.T.C.S. Moreover,you indicate thatXTZ Corporationwas a new business and is therefore a new "employer" under section (b) of article 5221b-5. V.T.C.S. Accordingly,XTZ Corporation is entitled to be taxed at the initialrate of contributionof 2.7X. SeeV.T.C.S. art. 5221b-5(b). -
We recognizethat theCommissionhas impliedauthority to inquire into thevalidity of a contract for servicebetween an individualand ABC Corporation.SeeV.T.C.S.art. 5221b-17(f)(l),and 5221b-17(g)(l); see also Guinnv.xate, 551 S.W.2d 783 (Tex.Civ.App. - Austin 1977, writ ref'd n.r.e.1. We conclude, however, that such an analysis is not relevant to this hypothetical example. ZTZ Corporation was created as a separate corporation to provide employees for ABC Corporation. The fact that these employees are the same individuals is inapposite. We read article 5221b-17(g)(l),V.T.C.S., to limit the Commission's authority to inquire into a relationship involving an independent contractor to situationswhere an individual. as opposed

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to a corporation, is providing the contracted services. Article 5221b-17(g)(l),V.T.C.S.. provides inpart:

'Employment'means any service, including service interstate commerce, performed in interstate commerce, performed for wages or under any contract of hire, written or oral,

contract written express or implied, provided that any services express implied, provided services performed individual performed by an individual for wages shall be

employment subject deemed tobe employment subject to thisAct unless and until it is shown to the satisfaction of the satisfaction Commission individual Commission that such individualhas been andwill continue control or direction over continue tobe free from control direction performance such services both under the performance of services his contract of service and in fact.

. . . contract service (Emphasis added).
Therefore, the Cormaissioniswithout authorityunder section (g)(l)of article 5221b-17,V.T.C.S., to find that the creation of KTZ Corporationwas a subterfugeto secure a lower tax rate.

The Texas Employment Commission does not have the expressed nor implied authority under article 5221b-5, V.T.C.S., to find that a reorganized corporation or a new corporation created to provide an employment service for another corporation were organized as a subterfuge to secure a lower tax rate. The Texas Employment CornmissIon is only authorized to tax a newly formed corporation under section (b) of article 5221b-5, V.T.C.S., unless a successor corporation and the predecessor corporation apply for a transfer of experience rate under section (c)(7) of article 5221b-5, V.T.C.S. There is no implied authority under section (g)(l) of article 5221b-17, V.T.C.S., for the Texas Employment Commission to tax a newly formed corporation providing an employment service, at the rate the Commission previously charged to the corporation receiving the service.
Very trulyyours 

# J

JIM+T Attorney General of Texas

JACK HIGFITCWEK FirstAssistant Attorney General

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MARY KELLER ExecutiveAssistantAttorneyGeneral

RICK GILPIN Chairman,OpinionCommittee
Preparedby Tony Guillory AssistantAttorneyGeneral

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