January 14, 1987 

Eonorable Lloyd Criss 

Chairman 

Labor and Employment Committee 

Texas Eouse of Representatives 

P. 0. Box 2910 

Austin, Texas 70769 

Opinion No. 34-620 

Re: Authority of the Texas 

Employment Commission to find 

that a corporate reorganization 

was invalid for the purpose of 

securing a new tax classification 

Dear Representative Criss: 

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 

hypothetical example to illustrate your 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 

'new employers.' The corporation might reorganize 

and change its name to the A-to-Z Corporation or 

the 7X.7, Corporation. [In any 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 to new employers. 

In that regard you 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, to use the hypothetical example cited 

p. 2794 
lionorable Lloyd Criss - Page 2 (m-620) 

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 imposed on the ABC Corporation? 

The legislature has delegated, with reasonable standards, power 

to the Commission to administer the Unemployment Compensation Act 

[hereinafter the 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 the Conmcission is to establish the rate of contribution to be 

paid by employers as defined in section (f) of article 5221b-17, 

V.T.C.S. The Texas Court of Civil Appeals has held that the statutory 

standards for establishinn rates are mandatory and exclusive. and the 

Commission is "powerless -to arrive at a different rate.." See Space 

Precision Machining 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's action. even though the matter 

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 these principles. 

If ABC Corporation reorganizes and changes its name to the A 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 in part: 

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 . . . . 

(Emphasis added). 

p. 2795 
Eonorable Lloyd Criss - Page 3 (JM-620) 

If ABC Corporation and A to Z Corporation do 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'd n.r.e.). 

Moreover, ABC Corporation is entitled to be taxed at the initial 

rate of 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 

another which at the time of such acquisition was 

an employer subject to this Act. . .~. 

Accordingly, we believe that the Commission has no authority to find 

that ABC Corporation reorganized and changed its name to A to Z 

Corporation to secure a lower tax rate. 

In regard to the second hypothetical example wherein ABC Corporation remains in existence and XPZ Corporation is organized and 

provides employees for ABC Corporation, -we conclude that, for the 

reasons previously discussed, the Cormnission does not have the 

authority to tax ZTZ Corporation at the rate it taxed ABC Corporation. 

A corporation contracting employment services for another corporation 

does not succeed to the experience ratio 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 that XTZ Corporation was 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 

initial rate of contribution of 2.7X. See V.T.C.S. art. 5221b-5(b). - 

We recognize that the Commission has implied authority to inquire 

into the validity of a contract for service between an individual and 

ABC Corporation. See V.T.C.S. art. 5221b-17(f)(l), and 5221b-17(g)(l); 

see also Guinn v.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 situations where an individual. as opposed 

p. 2796 
Eonorable Lloyd Criss - Page 4 (34-620) 

to a corporation, is providing the contracted services. Article 

5221b-17(g)(l), V.T.C.S.. provides in part: 

'Employment' means any service, including service 

in interstate interstate commerce, commerce, performed performed for wages or 

under any contract contract of hire, written written or oral, 

express express or implied, implied, provided provided that any services services 

performed performed by an individual individual for wages shall be 

deemed to be employment employment subject subject to this Act unless 

and until it is shown to the satisfaction satisfaction of the 

Commission Commission that such individual individual has been and will 

continue continue to be free from control control or direction direction over 

the performance performance of such services services both under his 

contract contract of service service and in fact. . . . (Emphasis 

added). 

Therefore, the Cormaission is without authority under section (g)(l) of 

article 5221b-17, V.T.C.S., to find that the creation of KTZ Corporation was a subterfuge to 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 truly yours J 

JIM+T 

Attorney General of Texas 

JACK HIGFITCWEK 

First Assistant Attorney General 

p. 2797 
. 

Bonorable Lloyd Criss - Page 5 (J&620) 

MARY KELLER 

Executive Assistant Attorney General 

RICK GILPIN 

Chairman, Opinion Committee 

Prepared by Tony Guillory 

Assistant Attorney General 

p. 2798