Pennsylvania rules on net loss carryover deduction


On Nov. 21, 2019, the Pennsylvania Commonwealth Court issued decisions in General Motors Corporation v. Commonwealth and 1. In both cases, a divided 2-1 panel severed the fixed-dollar limitation from Pennsylvania’s net loss carryover (NLC) deduction statute for the 2001 and 2006 tax years, respectively. Applying the reasoning of the Pennsylvania Supreme Court in Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth,2 the Commonwealth Court allowed General Motors (GM) to take an unlimited NLC deduction for the 2001 tax year, and RB Alden to do the same for the 2006 tax year. Prior to these decisions, it was unclear whether taxpayers could claim any NLC deduction or an unlimited deduction under the NLC statute applied to pre-2007 tax years, which included only a fixed dollar limitation.






Pennsylvania allows corporate taxpayers to carry forward unused prior net losses in order to reduce the amount of taxable income subject to Pennsylvania corporate net income tax (CNIT) in future years.3 In an effort to stimulate Pennsylvania’s economy, the General Assembly first introduced the NLC deduction during the 1980s. During an economic recession in the 1990s, the legislature temporarily suspended the deduction before reintroducing it with a fixed dollar limitation on the amount of net loss a taxpayer could claim. Subsequently, the legislature amended the legislation to allow taxpayers to claim the greater of: (i) a fixed dollar amount; or (ii) a percentage of taxable income.



The Nextel decision


In 2017, the Pennsylvania Supreme Court struck down the fixed dollar limitation provision of the NLC statute as applied to Nextel during the 2007 tax year. During this tax year, taxpayers could deduct the greater of either $3 million or 12.5% of taxable income. In 2007, Nextel had approximately $150 million in prior year net losses and $45 million in taxable income. However, due to the NLC deduction limitation, Nextel was only able to use approximately $5.6 million of available NLCs to offset its taxable income.4 Utilizing the percentage limitation, Nextel used a portion of its prior year losses and paid approximately $4 million in CNIT.

Nextel challenged the fixed dollar limitation provision of the NLC statute as unconstitutional, and the Pennsylvania Supreme Court agreed. Nextel argued that the statute violated the Uniformity Clause of the Pennsylvania Constitution, which requires that “[a]ll taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.”5 The Pennsylvania Supreme Court reasoned that the NLC statute violated the Uniformity Clause because some taxpayers could eliminate their tax burden while similarly situated taxpayers had to pay tax. The only difference between taxpayers who had to pay CNIT and those who did not was the amount of income that taxpayers reported. Taxpayers with less than $3 million in taxable income could completely eliminate their tax burden while similarly situated taxpayers would still have to pay tax.

In fashioning a remedy, the Pennsylvania Supreme Court concluded that the fixed dollar limitation could be severed from the remainder of the statute, while still enabling the statute to operate as the legislature intended. As a result, the court struck down the fixed dollar limitation but allowed the percentage limitation to remain. The remedy left Nextel in the same financial position because they were still subject to the percentage limitation instead of being allowed an unlimited NLC deduction.




Procedural history


In 2012, GM petitioned for a refund of its 2001 CNIT paid. During the 2001 tax year, GM had over $200 million in prior year net losses and approximately $9 million in taxable income. In 2001, the NLC deduction was capped at $2 million and did not yet include any percentage limitation.6 The Pennsylvania Department of Revenue Board of Appeals (BOA) denied GM’s refund request, and the taxpayer appealed to the Board of Finance and Revenue (BF&R), which sustained the BOA’s decision. GM then appealed to the Commonwealth Court, but the court held the case pending the Pennsylvania Supreme Court’s decision in Nextel due to the similarities in issues between the cases.

Prior to the GM litigation, RB Alden filed a petition with the BOA seeking reassessment of its taxes for the 2006 fiscal year. RB Alden challenged the Department’s classification of additional CNIT of approximately $2.25 million, based on an approximately $30 million capital gain resulting from the taxpayer’s sale of a partnership interest in June 2007. In the event that the gain was classified as apportionable business income, RB Alden argued that it was entitled to claim an NLC deduction in excess of the $2 million provided under the NLC statute, because the flat-dollar cap violated the Uniformity Clause. On appeal, the Commonwealth Court initially held that the $2 million fixed dollar limitation violated the Uniformity Clause, and directed the Department to calculate RB Alden’s CNIT without capping the amount it could take on its net loss carryover.7 Both RB Alden and the Commonwealth filed exceptions, which were overruled by the Commonwealth Court. Both parties then appealed to the Pennsylvania Supreme Court, which remanded the case back to the Commonwealth Court for reconsideration in light of the Nextel decision. 8 During the course of RB Alden’s appeal, the Pennsylvania Supreme Court decided Nextel.




Commonwealth Court severs fixed dollar limitation


The key point of contention in GM and RB Alden was the appropriate remedy in order to cure the Uniformity Clause violation in accordance with the Nextel decision. In Nextel, the Pennsylvania Supreme Court did not address the application of its decision to the NLC statute in pre-2007 tax years, when the percentage limitation was not available. The taxpayers argued that Nextel and federal constitutional protections required the court to sever the fixed dollar limitation and allow them to claim an unlimited deduction. In contrast, the Commonwealth argued that Nextel required the Court to sever the entire NLC provision and that the legislature never intended an unlimited NLC deduction, thus preventing the taxpayers from claiming any NLC deduction.



Application of Nextel


After first affirming that the fixed dollar limitation violated Pennsylvania’s Uniformity Clause, the court addressed the severability of the NLC statute. When severing part of a statute, the court attempts to carry out the intention of the legislature. The court attempted to determine whether the legislative intent of the statute would be best served by severing the fixed dollar limitation or the entire NLC deduction.

Pointing to Nextel, the court noted that the Pennsylvania Supreme Court rejected both allowing an unlimited deduction and eliminating the entire deduction, consistent with the legislative intent behind the NLC statute. In , the Pennsylvania Supreme Court referenced the twin policy objectives of the statute: encouraging business investment and maintaining the Commonwealth’s fiscal health. Forced to choose between the two rejected options, the Commonwealth Court addressed the main purpose of the NLC deduction. The court noted that the General Assembly originally introduced the NLC deduction to spur economic growth across Pennsylvania and subsequently amended the statute to include both the fixed limitation and the percentage limitation as budgetary safeguards. “Although fiscal health is clearly one of the policy concerns to be considered,” the court explained, “it is not the dominant public policy underlying the NLC provision.” Rather, the court determined that “the main purpose of the NLC provision . . . is to promote business investment in the Commonwealth.” Thus, the court concluded that severing the fixed dollar cap and upholding the remaining portions of the statute would best fulfill the legislature’s intent of enacting the NLC statute. Leaving the remainder of the statute in place, the court allowed the taxpayers to claim an unlimited NLC deduction for the pre-2007 tax years.



Federal Constitutional issues


In addition to challenging the fixed dollar limitation under the Pennsylvania Constitution, the taxpayers also challenged the cap under the Due Process and Equal Protection Clauses of the Fourteenth Amendment of the U.S. Constitution. In the context of a tax refund case, the Due Process Clause requires the court to put the disfavored taxpayer in the same position as favored taxpayers and provide “meaningful backward-looking relief.”9 Here, the court reasoned that the only way to provide meaningful relief remedying the unlawful NLC provision was to sever the fixed dollar cap and allow the taxpayers to claim an unlimited deduction.

In tax cases, the Equal Protection Clause of the U.S. Constitution requires taxes to apply in a nondiscriminatory way. The court interpreted U.S. Supreme Court precedent to find that when a tax classification violates a state’s own law, such classification also violates the Equal Protection Clause because it does not meet a rational basis standard of review.10 The court reasoned that the NLC fixed dollar limitation violated Pennsylvania’s Uniformity Clause, thus also creating an Equal Protection violation. Both of the severability options before the court would satisfy equal protection, the court concluded, but the Due Process Clause required the taxpayers to receive an unlimited NLC deduction.






The Commonwealth also challenged the retroactive application of Nextel. In determining whether relief should be retroactive or prospective, the court applied the following three-factor test established by the U.S. Supreme Court: (i) whether a new principle of law is established; (ii) whether retroactive application would further the decision; and (iii) whether the equites favor retroactivity.11 Reviewing the Nextel decision, the court concluded that the Pennsylvania Supreme Court merely applied long-standing precedent in Nextel and did not announce a new principle of law. The Commonwealth Court reasoned that the second element of the test was satisfied because severing the limitation would place the taxpayers in the same position as the favored taxpayers that paid no tax, thus furthering the Nextel decision. Finally, the court found that the equities weighed in favor of the taxpayers because the Commonwealth failed to provide adequate evidence that an unlimited deduction would be harmful to the state’s fiscal health. For these reasons, the court concluded, the best implementation of Nextel required retroactively applying its holding to prior tax years.






In a concurring and dissenting opinion, one Commonwealth Court judge concurred with the majority that the fixed dollar NLC cap violated the Uniformity Clause, but dissented on the severability of the fixed dollar limitation from the statute. The judge’s reading of Nextel required the court to invalidate the entire NLC statute, thus precluding the court from granting an unlimited NLC deduction. The dissent argued that the NLC deduction was reintroduced with legislative limits, interpreting this action to mean that the legislature would have preferred no NLC deduction to an unlimited deduction.






The GM and RB Alden decisions mark the latest in a series of uniformity cases considered by Pennsylvania courts, which apply a historically strict interpretation of the state’s Uniformity Clause.12 In addition to Nextel, the Pennsylvania Supreme Court recently ruled that the Uniformity Clause prohibited a school district from selectively appealing only the assessment of commercial properties while choosing not to appeal the assessments of residential homes.13 Similarly, the court held that the local share assessment imposed under the state’s Gaming Act violated the Uniformity Clause because it imposed grossly unequal local share assessments upon similarly situated licensed casinos located outside of Philadelphia based on gross terminal revenue.14


Unlike in Nextel, the taxpayers in GM and RB Alden received a full refund of taxes paid due to the resulting operation of the NLC statute without a percentage limitation. As a result, taxpayers capable of offsetting their CNIT liability with prior year net losses that challenged the fixed dollar limitation for tax years prior to 2007 would be entitled to a full refund of CNIT. This relief stands in contrast to less taxpayer-friendly remedies fashioned in other state tax cases. For example, the Pennsylvania Supreme Court agreed with PPG Industries’ argument that the in-state manufacturing exemption to the now-repealed capital stock and franchise tax unconstitutionally discriminated against interstate commerce.15 However, the court ultimately severed the manufacturing exemption from the tax and directed the Commonwealth to devise a retrospective remedy that would place taxpayers that previously benefitted from the manufacturing exemption in the same position as those that had not.16 In other cases, courts have been hesitant to grant backward-looking relief resulting in extensive taxpayer refunds in the interest of preventing significant revenue losses.17 Despite the relief granted in GM and RB Alden, these decisions ultimately may have limited impact due to Pennsylvania’s three-year statute of limitations for the filing of refund claims.18 Unless the corporate taxpayer has a pending appeal either at the administrative level or in court stemming from a period under which the NLC deduction only included the fixed dollar limitation, they will likely be unable to claim an unlimited deduction for these tax years.


Recognizing that its decisions may lead to a wave of refund claims from similarly situated taxpayers, the Commonwealth Court acknowledged that Pennsylvania would see a large increase in revenue from eliminating the fixed dollar limitation based on the Commonwealth’s recent decision to prospectively amend the NLC statute in order to cure the uniformity violation created by the fixed dollar cap. In response to Nextel, the state legislature amended the NLC statute for the 2018 tax year and thereafter to include only a percentage limitation. The NLC deduction is limited to 30% of taxable income for tax years beginning after Dec. 31, 2017, and 35% for tax years beginning after Dec. 31, 2018.19 Therefore, some entities that would not have paid any CNIT due to this decision would now be paying tax under a regime in which the percentage limitation to the NLC exists. Without such a change, the NLC deduction might have been subject to future challenges.


On Dec. 20, 2019, the Commonwealth filed exceptions to both the GM and RB Alden decisions, which may be considered before an en banc Commonwealth Court.20 Pending the Commonwealth Court’s decisions on the filed exceptions, it is possible that the Commonwealth may still appeal the cases to the Pennsylvania Supreme Court. One of the potential issues on appeal would be the reconciliation of the different remedies and resulting outcomes reached in Nextel compared to those reached in GM and RB Alden, despite the same uniformity violations found in different tax years.



1 General Motors Corp. v. Commonwealth, Pa. Commonwealth Court, No. 869 F.R. 2012, Nov. 21, 2019; RB Alden Corp. v. Commonwealth, Pa. Commonwealth Court, No. 73 F.R. 2011, Nov. 21, 2019 (opinion not reported).
2 171 A.3d 682 (Pa. 2017). For a detailed discussion of the Nextel decision, see GT SALT Alert: Pennsylvania Supreme Court Finds Net Loss Carryover Deduction Cap Violates Uniformity Clause; Severs Fixed Dollar Limitation.
3 72 PA. STAT. § 7401(3)4.
4 72 PA. STAT. § 7401(3)4.(c)(1)(A)(II).
5 PA. CONST. art. VIII, § 1.
6 72 PA. STAT. § 7401(3)4.(c)(1)(A)(I).
7 RB Alden Corp. v. Commonwealth, 142 A.3d 169 (Pa. Commw. 2016).
8 RB Alden Corp. v. Commonwealth, 194 A.3d 125 (Pa. 2018).
9 McKesson Corp. v. Florida Division of Alcoholic Beverages & Tobacco, 496 U.S. 18 (1990).
10 Allegheny Pittsburgh Coal Co. v. County Commission of Webster County, West Virginia, 488 U.S. 336 (1989).
11 Chevron Oil Company v. Huson, 404 U.S. 97 (1971).
12 For further discussion of Pennsylvania’s Uniformity Clause, see Vito A. Cosmo, Jr., Matthew D. Melinson & Patrick K. Skeehan, The Power behind Pennsylvania’s Uniformity Clause, PA. CPA JOURNAL, Fall 2015.
13 Valley Forge Towers Apartments, LP v. Upper Merion School District, 163 A.3d 962 (Pa. 2017). For a discussion of this case, see GT SALT Alert: Pennsylvania Supreme Court Finds Selective Appeals of Commercial Property Assessments by School District Unconstitutional.
14 Mt. Airy #1 LLC v. Pennsylvania Department of Revenue, 154 A.3d 268 (Pa. 2016).
15 PPG Industries, Inc. v. Commonwealth, 790 A.2d 252 (Pa. 1999).
16 PPG Industries, Inc. v. Commonwealth, 790 A.2d 261 (Pa. 2001). With respect to the adopted remedy, the Department disallowed the manufacturing exemption for unsettled tax years prior to 1999 and issued assessment notices to any taxpayers with pending appeals raising manufacturing exemption issues for those tax years as of July 1, 2002. However, taxpayers that did not have pending appeals or that withdrew or amended their appeals to remove manufacturing exemption claims were not assessed. Notice of PPG Remedy, Pennsylvania Department of Revenue, May 1, 2002.
17 For example, Gillette challenged a Michigan law that retroactively rescinded the state’s membership in the Multistate Tax Compact to Jan. 1, 2008, after the Michigan Supreme Court ruled that IBM could elect to compute its Michigan Business Tax liability for the 2008 tax year under the compact’s equally-weighted three-factor apportionment formula instead of Michigan’s single-sales-factor apportionment formula. IBM v. Michigan Department of Treasury, 852 N.W.2d 865 (Mich. 2014). The Michigan Court of Appeals upheld the law, finding a legitimate legislative purpose in enacting the law to correct a perceived misinterpretation of the compact provisions of the law. Gillette Commercial Operations NA & Subsidiaries v. Michigan Department of Treasury, 878 N.W.2d 891 (Mich. Ct. App. 2015).
18 72 PA. STAT. § 7407.3(a).
19 72 PA. STAT. § 7401(3)4.(c)(1)(A)(VII), (VIII).
20 Under the rules governing reviews of determinations by the Pennsylvania Board of Finance and Revenue, either the Commonwealth or the taxpayer may file exceptions to an initial determination by the Commonwealth Court, meaning that they may raise specific issues for reconsideration by the court. 210 PA. CODE § 1571(i).




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