[ 1.4.1 - Liability Information Sources ] [ 1.4.2 - Liability Provisions under 201.022 ] [ 1.4.3 - 201.022 Predecessor Still Pays Wages ] [ 1.4.4 - Definitions ] [ 1.4.5 - Transfer of Compensation Experience ] [ 1.4.6 - FL-176 Procedure In-State Employer ] [ 1.4.7 - Procedures for Out of State Employer ]

This section of the act outlines the provisions under which some employers become liable for state unemployment tax.

Regular, domestic, agricultural and non-profit 501(c)(3) employers may become subject under this section.

Liability under this section of the act is normally based on Status Reports. Liability can also be based on information from an employer, usually a C-13 or Status Change Form indicating they have been acquired by another employer.

An individual or employing unit can become liable under section 201.022 of the Texas Unemployment Compensation Act. Liability under section 201.022 occurs when an individual or employing unit that acquires or otherwise receives, through any means, all or part of the organization, trade, business, or workforce of another that was an employer subject to this subtitle at the time of the acquisition.

Sole proprietors may be liable under section 201.022 without having immediate employment and without paying wages.

Employers except for sole proprietors must have immediate employment for 201.022 to apply. This means the first employment date and the date of acquisition should be the same or very close. As a general rule, more than three days difference between the first employment date and the acquisition date negates 201.022. If these dates are not close enough the examiner must contact the employer for clarification to determine if there was a reasonable break in employment (i.e. due to renovations, etc).

In order for 201.022 to apply, the successor has to acquire or otherwise receives through any means, all or part of the organization, trade, business, or workforce of another that was an employer subject to this subtitle at the time of the acquisition. The predecessor has to be in operation although it does not necessarily have to have employment.

Example: A sole proprietor incorporates as of 1-1-09 but the only employee is the officer and he does not receive wages until 4-1-09. 201.022 will apply after wages have been paid as long as the predecessor was an ongoing business when acquired.

Employers who hold a 501(c)(3) exemption letter may become liable under this section by meeting the conditions of 201.022.

Staff Leasing Companies (PEO):

A staff leasing company should not be treated as the successor (total or partial) to one of their clients. It is permissible, however, for one staff leasing company to acquire another staff leasing company. In this situation, the successor staff leasing company can be considered the successor. See Chapter 2 – “Acquisition Staff Leasing Company”.

Situation: A corporation acquires the ongoing operations of another liable employer but immediately goes to a leasing company. The corporation will not employ anyone and will not pay wages.

Questions: Does the corporation become liable under 201.022/204.083? Do we open and close the corporation as we do an individual without employment with a 9/99 chargeable quarter?

Answer: No. In order to become liable under 201.022 the successor has to be an individual or employing unit that acquired the organization, trade or business of another, or substantially all the assets thereof, of another that was a subject employer.

In this case the corporation is not an individual and is not an employing unit. Because the corporation went to a leasing company, current law requires TWC to recognize the leasing company, and not the corporation, as the employer.

In situations like this it is important to still assign an account number to the corporation and make that account not-liable. The corporation will need to be listed in the leasing company’s client list.

If liability is later met, it can then be established at that time.

If predecessor is with a staff leasing company (closed reason 2) and an acquisition/merger or conversion occurs, the successor has to have employment on the date of acquisition and pay wages for 201.022 to apply. See Chapter 2 – “Acquisition Staff Leasing Company”.

If successor stays with the staff leasing company after the acquisition/merger or conversion 201.022 will not apply, even if they pay wages at a later date. Because they were not an employing unit on the date of acquisition.

Bankruptcy Stop:

If there is a bankruptcy STOP on the predecessor account you will need to contact the Special Actions Unit (SAU) to verify if you can show the acquisition. Update FTC with your actions. See Chapter 2 – “Acquisition with Bankruptcies” for complete information regarding acquisitions on accounts with a bankruptcy STOP.

When requesting information from SAU on an account involved in an acquisition and there exists a bankruptcy STOP on either account:

Provide on your e-mail to global address RID Tax Bankruptcy:

• Predecessor account
• Successor account
• Acquisition date
• Also, any other information (send copies if necessary) that is not readily available on the EMF screen.

SAU will respond with:

• Proceed with acquisition/transfer experience if applicable,
• Do not record acquisition, or
• No information found, proceed according to Status procedures.

When requested to follow normal status procedures, work the acquisition just like any other acquisition. Responses from SAU should be indicated on FTC.

Occasionally 201.022 will apply to an acquisition, but the predecessor needs to continue to report wages for some reason. Even though the predecessor continues to pay wages, under the law a successor can be held liable under Section 201.022 by acquiring or otherwise receives through any means, all or part of the organization, trade, business, or workforce of another that was an employer subject to this subtitle at the time of the acquisition. A business might have accounts receivables outstanding, residuals may be paid, or officers might continue receiving wages.

In situations where we hold the successor liable under Section 201.022, whether the compensation experience transfers or not, it is possible for the successor employer to file an application for partial transfer of compensation experience.  The partial transfer will be processed as any other partial, using the same approval criteria.

Regardless of whether the compensation experience was transferred or not, if residual wages are being paid, the predecessor's final wages date can be amended after the date of acquisition. If the predecessor has resumed operations after the acquisition date and will continue to have employment, then the account will be reopened (if the acquisition occurred after 9-1-05). See Chapter 1 – “C-111 Accounts” if acquisition occurred prior to 9-1-05.

Employer

"An individual or employing unit that acquires or otherwise receives through any means, all or part of the organization, trade, business, or workforce of another that was an employer subject to this subtitle at the time of the acquisition”.

This section does not require an individual to be an employing unit to become an employer. Therefore, any individual who acquires or otherwise receives through any means, all or part of the organization, trade, business, or workforce of another that was an employer subject to this subtitle at the time of the acquisition, becomes an employer upon such acquisition regardless of whether or not the individual is an employing unit at the time of acquisition.

In this case the sole proprietor would become liable on the date of acquisition and the account inactivated effective the same date. A default chargeable quarter of 9-99 would be given in this situation if 204.083 does not apply. The predecessor’s chargeable quarter would apply if 204.083 applies. See Chapter 1 – “First Chargeable Quarter 9-99”.

Acquisition (acquired)

Black's Law Dictionary defines acquisition as the act of becoming the owner of certain property; the act by which one acquires or procures the property in anything.

For the purposes of this subsection, an acquisition is a gaining by any means. In most cases, it can be expressed as gaining of possession. The acquisition does not have to be one that transfers all or any of the title. It can be the mere right to possess and use under any kind of an agreement. The acquisition may be under an agreement to rent, to lease or otherwise to possess and use. It would seem to be limited only insofar as there is a legal right to possess.

The acquisition, through the gaining of a right to possession and use, need not be an acquisition for any specific period of time. The acquisition can be under an agreement transferring the possession for an indefinite period of time, the limitation of which is based upon a contingency. Through the gaining of the right to possession for any period of time, there is the type of acquisition which fulfills this one condition.

The language of this subsection conditions its application to create liability on the fact of acquisition without reference to the purpose of the acquisition or the intended use to be made of the things acquired. If the language of the Act is literally applied, it seems to be unimportant whether there was any intent to continue the trade or business of which assets or organization was acquired. For this reason, the subsection is applied to create liability on the basis of an acquisition, even though the assets acquired are never used in the operation of the business. The assets may have been immediately stored, sold or otherwise disposed of. The point is that inquiry need not be made into the question of intended use or actual use of the assets acquired.

Organization

Is the people and their arrangement within the business. A liability decision under 201.022 should not be based solely on the organization. Nevertheless, any case under this subsection can be strengthened by showing that all or part of the same people continued in the business after the date of acquisition and that these people are working at the same jobs they had prior to the date of acquisition.

Trade or Business

Black's Law Dictionary defines Trade as "The act or the business of buying and selling for money; traffic; barter." It defines Business as "Employment, occupation, profession, or commercial activity engaged in for gain or livelihood." The Commission considers trade and business to be synonymous since proof that either has been acquired is likely sufficient to sustain an assertion that the other has also been acquired. It would be difficult to support proof of liability under this subsection by showing the acquisition of only trade or business; however, any evidence that the successor has the same trade or business as that of the predecessor makes a stronger total case when considered together with the acquisition of assets or organization. There may be some evidence that the trade or business has been acquired if it is found that:

1. The same type of business is being conducted;
2. The business is being conducted in the same location;
3. The business is being conducted under the same trade name;
4. The doors of the place of business were not closed at the time of the change of ownership;
5. The successor acquired use of the same franchises from the predecessor or from the manufacturer;
6. The successor, through some arrangement, distributes the same line of products as an agent, consignee, etc.;
7. Through advertisements, letterheads, or other media, the public is notified that the previously existing business has been continued without change other than a change in ownership.

Assets

Has reference to those assets of the predecessor used in the conduct of a business on which taxes are payable.

Relationship between Subsection 201.022 and 204.083.

Section 204.083 applies when:

The transfer of the predecessor employer’s compensation experience to the successor employer is required if the predecessor employing unit transfers, through any means, all or part of the organization, trade, or business, to the successor employer and there is substantially common management or control or substantially common ownership of the entities.

Section 204.083 - An employing unit that acquires all or part of the organization, trade, or business acquires the compensation experience of the predecessor employer if:

• On the date of the acquisition, was the previous owner(s), or any partner(s), officers(s), shareholder(s), other owner(s) or a person related by blood or marriage to any of these individuals, holding a legal or equitable interest in the predecessor business, also an owner, partner, officer, shareholder, or other owner of a legal or equitable interest in the successor business;
  
  
• On the date of the acquisition, the previous owner(s), partner(s), officer(s), shareholder(s), other owner(s) or a person related by blood or marriage to any of these individuals, holding a legal or equitable interest in the predecessor business, holds an option to purchase such an interest in the successor business or
  
  
• After the acquisition, the predecessor continues to do any of the following:

Equitable interest means having the same, equal or just legal right to the business as any other owner.

Consanguinity means related by blood by 1st degree relationship. Affinity means related by marriage by 1st degree relationship. First degree of consanguinity or affinity is determined under Chapter 573, Government Code.

The 1992 law changed to indicate that the definition of 1st degree relationship is a:

• Child which includes a son/daughter or
• Stepson/Daughter or
• Son/Daughter-in-law

Parent which includes a:

• Mother/Father or
• Step Mother/Father or
• Mother/Father-in-law

1st degree does not include sister, brother, grandchild or grandparents because they are relatives of the 2nd degree.

Officer means those persons who fill the offices which are provided for in the corporate charter such as president, treasurer, etc. though in a broader sense the term includes vice presidents, general managers and other officials of the corporation. Anyone can be a corporate officer if they are designated as such in the corporate charter.

Compensation experience is the tax rate and taxable wage base. If  204.083 applies then the predecessor’s first chargeable quarter and tax rate will mirror over to the successor and the successor will take credit towards the taxable wage base limit for any employees paid by the predecessor during the year of the acquisition.

Section 204.083 is mandatory and an examiner must investigate to determine if the transfer applies. Usually it is obvious in the documentation on file that common ownership exists. An example of this is when a sole proprietor incorporates his business. An examiner can see that the sole owner, the predecessor, is now listed as an officer in the corporation, the successor.

Acquisition Procedures for New Accounts

If a Status Report is received from an Employer showing they acquired another account you will need to:

• Verify the information received against the Status Master File (STS). Check the account numbers, acquisition date, last wages date and number of employees to determine if the information supplied by the Employer is correct.
• If the information is correct, record the acquisition on the STA screen.
• If the information on the documents appears incorrect or incomplete, a phone call to a knowledgeable person can be made to resolve any questions.
• If all questions are resolved then record the acquisition on the STA screen.
• FTC comments need to be thorough and complete including name, title of contact person and exactly what was said acknowledging whether there was an acquisition or not, and if 204.083 does or does not apply.

If conclusive information is not available or unable to verify via phone calls, the accounts examiner will set up successor 201.022 but without 204.083 application and the accounts examiner will send a field assignment, if an in-state employer, to determine 204.083 application. See Chapter 1 – “FL-176 Procedure In-State Employer”.    
                        
If employer is an out-of-state employer and the accounts examiner is unable to verify 204.083 acquisition using available documents or phone calls, accounts examiner will send an FL-267. See Chapter 1 – “Procedures for Out of State Employer”.

Note: If there is an actual acquisition of a business/location the partial acquisition will be recorded, the 5% rule would not apply.

5% Rule

We will not record acquisitions, with or without a rate transfer, if:

• The number of employees transferred from predecessor divided by the total number of employees with the predecessor is 5% or less, and
• We conclude that the transfer was not done to circumvent the experience rating system.
• Make certain that the acquisition was only a movement of employees and not an acquisition of a location or assets. Acquisition can still be processed when <5% rule is met if the employer requests the acquisition.
• Calculation of 5% rule is determined by dividing the number of employees transferred from predecessor by the total number of employees in predecessor account.
• The accounts examiner will document the FTC comments with their findings.

Note: If there is an actual acquisition of a business/location the partial acquisition will be recorded, the 5% rule would not apply.

[ 1.4.6.1 - STA Screen Processing ]

This procedure applies only to accounts with Texas addresses.

An FL-176 is a system generated assignment sent to Field Tax instructing them to verify the acquisition and secure a Status Report.

Liability under 201.022 can also be based on information received indicating that an acquisition has occurred. Usually this information is a form C-13 or Status Change Form. Both are used by employers to advise the commission of any changes to their account, as well as discontinue employment.

When an examiner encounters a situation where 201.022 applies and all we have is documentation from the predecessor, the examiner will:

1. Search for an account number by name, FEIN, address, phone number, etc. and if no account number is found then assign a pending number to the successor on EMF.
2. The next working day, enter the acquisition on the STA screen making sure you complete the form letter portion with 176.
3. Make printout of STA transaction for successor and insert the correspondence (Status Change Form, C-13, C-3, etc.) in a red folder with printout, and place it in the FL-176 basket.

The Status Operations Unit (SOU) will retrieve the printout and send the field the request to verify the acquisition and obtain all necessary forms.

To classify an account liable under 201.022 using the STA screen:

Access the STA screen.

Close the predecessor account by completing the SUSP section of the STA screen.

1.  Key	ACCT  Number
Press	<Enter>
The record of the account will display
2. Key	REG SUSPD DT  (Suspend date should match the acquisition date)   DOM SUSPD DT   AGR SUSPD DT     AGR 1, 2 or 3   NORPTDUE        (Final wages date) REAS => 4          ("4" - acquisition by a new account - if aquisition is changing liability on successor 201.022)
3.  Key	A  ("A" adds a successor)
	SUCC (Successor account number) DT      (Acquisition date should match the suspend date) T/P      (Key appropriate code - See Chapter 1 - "Acquisition Codes") A/N     (Key appropriate code - See Chapter 1 - "Acquisition Codes")
4. Press <PF5> to add record.
Key successor account.
1.  Key	ACCT  Number
Press	<Enter>
The record for the account will display.
2.  If the federal ID, phone number or styling of account need changes:
Key	FEID PHONE
	LINE 1 LINE 2 LINE 3 LINE 4 LINE 5 LINE 6
3.  Key	TYP  (Ownership type)
	REG   CODE     (Use appropriate code:  1  => is for liable DOM CODE                                             2 =>  is for not liable) AGR  CODE
4.  Key	SECT                  => 2 SUBJ DT            (Subject date should match the acquisition date of Predecessor) 1ST TX WGS      1ST CHG QTR   (Use appropriate chargeable quarter.  See Chapter 1 - "First Chargeable Quarter Calculation") FORM LETTER (Key 176 if needed)
5.  Key	RPTS YY
6.  Key	PRED (Predecessor account number) DT      (Acquisition date) T/P     (Use appropriate code - See Chapter 1 - "Acquisition Codes") A/N    (Use appropriate code - See Chapter 1 - "Acquisition Codes")
7. Press <PF5> to add record.
Do not use the STR screen if letters need to be ordered on the STA screen.  Use a C-10.
Do not use the STR screen when the transaction involves a predecessor or successor.  The computer will go to STR and extract the coding and will not return to STA (predecessor/successor fields).
Prepare C-10's if coding more than three years.

This procedure applies only to accounts with out-of-state addresses.

An FL-267 is a 2008 PC Letter sent on pending or non liable accounts suspected of incurring liability under Section 201.022.

This letter requests the completion of a status report to determine 201.022 liability and 204.083 application.

When an accounts examiner receives a correspondence (usually a C-13 or a Status Change Form) from the predecessor:

• Search for an account number for successor by name, address, etc. If no account number is found then assign a pending number to the successor.
• If correspondence has incomplete address for successor, contact predecessor to secure a good address and phone number. If predecessor cannot provide a good address or phone number, attempt to search for successor on the internet to obtain a complete address.
• Send FL-267.
• Trace FL-267 for three months.
• Update FTC comments to document actions taken on both predecessor and successor accounts.
• If no response is received to FL-267 attempt to contact successor by phone (if available) to secure C-1.
• If unable to secure C-1 by telephone, make successor account non-liable and amend predecessor account suspend reason code from “7” to reason code “1”.
• Update FTC comments to document actions taken on both predecessor and successor accounts.

Exception: If accounts examiner has articles of conversion, successor account can be established 201.022 with 204.083 application. FL-267 will be sent to successor to obtain liable C-1. Trace as procedures above.