Pennsylvania severs net loss carryover provision


On Dec. 22, 2021, a divided Pennsylvania Supreme Court partially reversed the decision of the Pennsylvania Commonwealth Court in General Motors Corporation v. Commonwealth by severing the state’s entire net loss carryover (NLC) deduction provision as applied to the 2001 tax year to best reflect the intent of the Pennsylvania legislature.1 However, the Court affirmed the Commonwealth Court’s decision, relying on due process grounds, to provide the taxpayer a refund of corporate net income tax (CNIT). Agreeing with the Commonwealth Court that its 2017 decision in Nextel Communications of the Mid-Atlantic v. Commonwealth2 applies retroactively to the 2001 tax year, the Court reasoned that a CNIT refund would remedy the due process violation of the taxpayer’s rights under U.S. Supreme Court case law.






Pennsylvania law allows corporate taxpayers to carry forward unused prior year net losses to reduce the amount of taxable income subject to Pennsylvania CNIT in future years.3 In an effort to stimulate Pennsylvania’s economy, the Pennsylvania legislature first introduced the NLC deduction in 1980. During an economic recession in the early 1990s, the legislature suspended the deduction from 1991-1994 to address budgetary concerns, before reintroducing it in 1995 with a fixed dollar limitation (flat dollar cap) on the amount of net loss a taxpayer could claim in a particular tax year. Beginning with the 2007 tax year, the legislature amended the legislation to allow taxpayers to claim the greater of: (i) the flat dollar cap; or (ii) a percentage of taxable income.




Procedural History


In 2012, General Motors (GM) petitioned the Pennsylvania Department of Revenue Board of Appeals (BOA) for a refund of CNIT paid during the 2001 tax year. During that 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.4 GM argued that the $2 million flat dollar cap resulted in a “progressive effective tax rate” in violation of the Pennsylvania Uniformity Clause.5 The BOA denied GM’s refund request, finding that it did not have the authority to declare statutory provisions unconstitutional. The taxpayer appealed the decision to the Pennsylvania Board of Finance and Revenue (BF&R), which sustained the BOA’s decision also on the grounds that it lacked the authority to rule on the constitutionality of tax statutes. GM then appealed to Pennsylvania Commonwealth Court, which held the case pending the Pennsylvania Supreme Court’s decision in Nextel due to the similarities in issues between the cases.



The Nextel decision


In 2017, the Pennsylvania Supreme Court decided Nextel, holding that the flat dollar cap contained in the NLC statute as it existed in 2007 violated the Uniformity Clause. During this tax year, taxpayers could deduct the greater of either $3 million or 12.5% of taxable income.6 Nextel challenged both the flat dollar and percentage caps as unconstitutional, and the Pennsylvania Supreme Court agreed as to the flat dollar cap portion. The Court reasoned that the NLC statute violated uniformity because some taxpayers could eliminate their tax burden while similarly situated taxpayers had to pay tax. In fashioning a remedy, the Court severed the flat dollar cap from the remainder of the statute, while preserving the percentage cap portion. 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 as it requested.7



Commonwealth Court decision in GM


After the Nextel decision, the Commonwealth Court issued its opinion in the GM case in November 2019.8 Noting that the parties did not dispute whether the $2 million NLC deduction cap for the 2001 tax year violated the Uniformity Clause under Nextel, the court primarily considered the appropriate remedy to cure the uniformity violation.

First, the court addressed the severability of the NLC statute as applied to the 2001 tax year. The court observed that, unlike the 2007 tax year NLC deduction provision applicable in Nextel, the 2001 tax year NLC provision did not include a percentage-based deduction cap, which the Court had embraced as a remedy in Nextel. The court recognized that the 2001 tax year provisions offered two options for severance: (i) sever the flat $2 million deduction from the remainder of the NLC statute and allow corporations to claim an unlimited net loss; or (ii) strike down the entire NLC provision. Neither of those options met the twin policy objectives of the statute as identified in Nextel: encouraging business investment and maintaining the Commonwealth’s fiscal health. The court then determined that the main purpose of the NLC provision was to promote business investment, observing that the NLC deduction provision had existed during the 1980-1991 tax years without a cap. Accordingly, the court concluded that severing the $2 million flat dollar cap and upholding the remaining portions of the statute would best fulfill the legislature’s intent of enacting the NLC statute.

Rejecting GM’s argument that the flat dollar cap violated the Due Process Clause of the U.S. Constitution, the Commonwealth Court reasoned that the only way to provide meaningful backward-looking relief to remedy an unlawful NLC provision was to sever the flat dollar cap and allow GM to claim an unlimited NLC deduction.9 As a result, the court allowed GM to claim an unlimited NLC deduction for the 2001 tax year, also ruling that the best implementation of Nextel required retroactive application of its holding to prior tax years. After filing exceptions with the Commonwealth Court, the Commonwealth appealed the decision to the Pennsylvania Supreme Court.




Pennsylvania Supreme Court decision


On appeal, the Commonwealth argued that Nextel should not have been applied retroactively and that the proper taxpayer remedy would be to eliminate the entire NLC deduction. In response, GM argued that if the entire NLC deduction is required to be severed, a refund should be granted on the basis that due process requires that GM be placed in a position equal to other favored corporate taxpayers.

First considering whether Nextel should apply retroactively to GM’s 2001 tax return, the Court reviewed several Pennsylvania cases10 discussing a three-factor test for retroactive application of case law grounded in the U.S. Supreme Court’s opinion in Chevron Oil Co. v. Huson.11 Under Chevron, a court determines: (i) whether the decision establishes a new principle of law; (ii) whether retroactive application would further the decision; and (iii) whether the equities favor retroactivity. Applying Chevron, the Court concluded that “Nextel did not establish a new principle of law but instead ‘steadfastly adhered’ to a century of case law interpreting the Uniformity Clause to invalidate tax ‘classifications based solely upon the quantity or value of the property being taxed.’”12 For these reasons, the Court concluded that the Chevron test favored the retroactive application of Nextel.

Finding that Nextel applied retroactively and noting the flat dollar cap’s uniformity violation, the Court considered whether to sever the $2 million cap or to eliminate the entire NLC deduction. Keeping in mind the state legislature’s twin policy goals of promoting business development and protecting the fiscal health of the Commonwealth, the Court concluded that “severance of the NLC provision in its entirety is more consistent with the General Assembly’s intent, as evidenced by the history of the NLC deduction provision.” In doing so, the Court noted that the deduction was initially enacted without a cap, later eliminated to address budgetary concerns, and then reinstated with a cap. For these reasons, the Court reversed the Commonwealth Court’s severance of the $2 million deduction cap and instead struck the NLC deduction for the 2001 tax year in its entirety.

Moving to GM’s due process arguments, the Court reviewed the U.S. Supreme Court’s decision in McKesson v. Florida Division of Alcoholic Beverages, a tax refund case that requires courts to put disfavored taxpayers in the same position as favored taxpayers to provide “meaningful backward-looking relief.”13 Applying McKesson to GM’s facts, the Court determined that merely severing the deduction did not remedy the discriminatory impact on GM because the company remained disadvantaged compared with smaller taxpayers that were able to the NLC deduction to entirely offset their entire taxable income for the 2001 tax year. Instead, the Court reasoned that “the due process clause requires the Commonwealth to equalize GM’s position with the favored taxpayers who were not subject to the $2 million NLC deduction cap by refunding the tax GM paid as a result of the imposition of the NLC deduction cap.” Noting that the statute of limitations prevented additional tax assessments for taxpayers benefitting from an unlimited 2001 NLC deduction, the Court concluded that a refund was warranted in GM’s case. Affirming the Commonwealth Court, the Court remanded the case to the BF&R to recalculate GM’s CNIT liability without capping the NLC deduction and issue a refund for the 2001 tax year on that basis.





Two Pennsylvania Supreme Court justices issued separate dissenting opinions. In disagreeing with the majority’s application of the McKesson case, one justice argued that due process did not require GM to be refunded because the Nextel case reflected a new rule that was a “fundamental break from precedent.” Further, the dissent questioned whether Nextel could be applied retroactively in GM’s case.

In a separate dissent, another justice wrote that Nextel did not apply retroactively, arguing that Pennsylvania case law has established that court decisions should take effect as of the date of the decision. The dissent argued that retroactive application of a decision striking down a tax statute subjects taxing authorities to a “potentially devastating repercussion” of refunding taxes that were paid, budgeted and spent. The dissent noted that taxpayers would still have an incentive to challenge the constitutionality of a tax statute because invalidation would still benefit such taxpayers prospectively, even though that was not the case in GM.






The Court’s decision in GM marks the latest chapter in a long line of uniformity cases considered by Pennsylvania courts, which apply a historically strict interpretation of the state’s uniformity clause. The GM case represents the third iteration of NOL cases under which taxpayers have challenged the constitutionality of Pennsylvania’s NLC provision as applied to different tax years. Most recently, the Commonwealth Court ruled in Alcatel-Lucent USA Inc. v. Commonwealth that a corporate taxpayer was not entitled to a refund of CNIT paid for the 2014 tax year when their use of NLCs was limited by the state’s percentage limitation for net loss deductions.14 Unlike in Nextel and Alcatel-Lucent, the NLC deduction in GM was only limited by the flat-dollar deduction in the 2001 tax year.

As in previous Pennsylvania NOL cases, the Pennsylvania Supreme Court differed from the Commonwealth Court on the appropriate taxpayer remedy, finding that elimination of the entire NLC deduction during the 2001 tax year was most consistent with the intent of the state legislature in enacting the NLC statute. However, the Court also concluded that a tax refund was appropriate in this instance to place GM in the same position as those taxpayers that benefitted from the $2 million NLC cap to satisfy due process requirements. Although the Court ordered a refund of tax to GM, the result does not necessarily mean that GM’s 2001 tax liability will be reduced to zero. Instead, the Court remanded the case to the BF&R to recalculate GM’s CNIT liability without capping the NLC deduction, after which a refund would be issued. In re-calculating GM’s refund, it is possible that the BF&R may take into account future tax years in which GM may have utilized NLCs originally denied in 2001.

The Court’s decision raises additional questions regarding how remedies may be applied in future state tax cases. The Court justified its decision to sever the entire NLC deduction cap and order a refund for due process reasons on the basis that Pennsylvania’s statute of limitations prohibits any additional assessments of tax for those taxpayers that benefitted from the $2 million NLC cap in 2001. As a result, the Court may have fashioned the remedy it did keeping in mind the very limited applicability of the decision due to the inability of taxpayers to file refund claims for tax years falling well outside the state’s three-year statute of limitations. However, the decision may impact those taxpayers with pending appeals for any tax years prior to 2007 when only the flat dollar cap was in place.15

The GM decision also raises important financial statement considerations based on the Court’s conclusion that Nextel applies on a retroactive basis. At first blush, it would appear that taxpayers may consider the potential financial statement impact of the GM decision for tax years through 2006, the last tax year for which only the flat dollar cap was effective. The result may affect the ability to utilize and carry forward net losses subject to the percentage limitation during later tax years under which Nextel applies. A more wide-ranging open question is whether the GM analysis, in combination with other decisions implicating Pennsylvania NLCs, could be extended to apply to the utilization of NLCs from the 2007 through 2016 tax years in which both a flat-dollar cap and a percentage limitation were in effect.16 In any event, impacted taxpayers may need to consider revisiting deferred tax assets for financial statement purposes resulting from the GM decision.



1 General Motors Corp. v. Commonwealth, No. 12 MAP 2020, Pennsylvania Supreme Court, Dec. 22, 2021.
2 117 A.3d 682 (Pa. 2017).
3 72 PA. STAT. § 7401(3)4.
4 72 PA. STAT. § 7401(3)4.(c)(1)(A)(I).
5 Pennsylvania’s Uniformity Clause 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 the general laws.” PA. CONST. art. VIII, § 1.
6 72 PA. STAT. § 7401(3)4.(c)(1)(A)(II).
7 Nextel appealed the decision to the U.S. Supreme Court, which ultimately declined to hear the case in June 2018.
8 222 A.3d 454 (Pa. Commw. 2019). The Commonwealth Court issued an identical decision in RB Alden Corp. v. Commonwealth, No. 73 F.R. 2011 (Pa. Commw. 2019), given the similar issues and tax years involved. The Pennsylvania Supreme Court held the appeal of the RB Alden case pending its decision in GM. For further discussion of the Commonwealth Court’s decision in GM and RB Alden, see GT SALT Alert: “Pennsylvania rules on net loss carryover deduction.”
9 Citing McKesson v. Florida Division of Alcoholic Beverages & Tobacco, 496 U.S. 18 (1990).
10 Oz Gas, Ltd. v. Warren Area School District, 938 A.2d 274 (Pa. 2007); American Trucking Associations, Inc. v. McNulty, 596 A.2d 784 (Pa. 1991).
11 404 U.S. 97 (1971).
12 Quoting Nextel, 117 A.3d 682 (Pa. 2017).
13 In McKesson, the U.S. Supreme Court held that the Due Process Clause required Florida to provide meaningful post-payment relief for taxes paid under a scheme imposing a lower tax burden on alcoholic beverages manufactured using products grown in Florida than on alcoholic beverages not using Florida products.
14 Alcatel-Lucent USA Inc. v. Commonwealth, No. 803 F.R. 2017, Pennsylvania Commonwealth Court, Sept. 13, 2021. For further discussion of this case, see GT SALT Alert: “Pennsylvania denies refund related to NLC limitation.”
15 It should be noted that GM has 90 days from the date of a judgment or order, or until March 22, 2022, to ask the U.S. Supreme Court to hear the case by filing a petition for a writ of certiorari.
16 Soon after the Nextel decision, the Department released guidance explicitly stating that it would not apply Nextel for the 2007-2016 tax years, leaving both the flat dollar and percentage limitation caps in place. See Corporation Tax Bulletin 2018-02 (May 10, 2018). It remains to be seen whether the Department will issue similar guidance clarifying how the GM decision will be specifically applied to pre-2007 tax years as opposed to the 2007-2016 tax years.




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