On Dec. 28, 2022, the Pennsylvania Commonwealth Court ruled that a corporate taxpayer was entitled to a refund of corporate net income tax (CNIT) paid for the 2014 tax year when the use of net loss carryovers (NLC) was limited by the state’s percentage limitation for net loss deductions.1 Reversing an earlier panel decision that had previously denied the taxpayer a refund, an en banc Court applied the Pennsylvania Supreme Court’s 2021 decision in General Motors v. Commonwealth (GM), which established that its landmark Nextel Communications v. Commonwealth decision striking down the fixed-dollar limitation on NLC deductions applies retroactively and that due process requires equalizing the tax positions between favored and non-favored corporate taxpayers.
Alcatel-Lucent, a corporation providing IP networking, broadband access and cloud technology services, carried forward approximately $791 million of net losses that had accumulated since 2000 into the 2014 tax year. During 2014, the taxpayer had taxable income apportioned to Pennsylvania of approximately $27 million before any net loss deductions. During the 2014 tax year, Pennsylvania’s NLC deduction was the greater of 25% of taxable income or $4 million.2 Using the percentage limitation, the taxpayer took a net loss deduction of approximately $6.8 million, ultimately resulting in a CNIT liability of approximately $2 million. The taxpayer later sought a refund of the tax paid, arguing that Pennsylvania’s NLC deduction provision violated the Uniformity Clause of the Pennsylvania Constitution3 because the company still owed tax after the application of the NLC deduction, while other smaller taxpayers utilizing the $4 million NLC limit did not.
The Nextel decision
In 2017, during the appeal of Alcatel-Lucent’s case, the Pennsylvania Supreme Court decided Nextel, holding that the fixed-dollar limitation portion of Pennsylvania’s NLC provision as it existed in 2007 violated the Pennsylvania Uniformity Clause because some taxpayers could eliminate their CNIT liability while similarly situated taxpayers were required to pay tax.4 In fashioning a remedy, the court determined that severing the fixed-dollar limitation from the NLC provision, while retaining the percentage limitation, satisfied the twin policy objectives of the statute: encouraging business investment and maintaining the Commonwealth’s fiscal health. In response to Nextel, the Pennsylvania Department of Revenue decided that it would apply Nextel on a prospective basis only, meaning that it did not apply the fixed-dollar limitation beginning in the 2017 tax year and beyond, and would not assess corporate taxpayers utilizing the fixed-dollar limitation prior to the 2017 tax year.5
The initial Alcatel-Lucent decision
In September 2021, a Commonwealth Court panel determined that Alcatel-Lucent was not entitled to a refund of the CNIT paid when the company’s use of NLCs was limited by the percentage limitation.6 In denying the refund, the panel found that Nextel did not require a retroactive elimination of the percentage limitation based on the taxpayer’s income. Instead, the panel ruled that prospective application of Nextel did not violate the state’s uniformity principles or the Due Process Clause of the U.S. Constitution.
The General Motors decision
Three months later in the GM case, the Pennsylvania Supreme Court applied Nextel on a retroactive basis in severing the state’s entire NLC deduction as applied to the 2001 tax year.7 Unlike in Nextel and Alcatel-Lucent, the NLC deduction provision at issue in GM contained only a $2 million fixed-dollar limitation in the 2001 tax year. To remedy the uniformity violation, the court struck down the NLC deduction statute in its entirety. Looking to U.S. Supreme Court case law, the court reasoned that the Nextel decision did not establish a new principle of law, and instead merely drew upon many other court decisions interpreting the Uniformity Clause in the same way.8 Additionally, the court found that the Due Process Clause requires “meaningful backward-looking relief” to put disadvantaged taxpayers in the same position as taxpayers that were able to completely offset their CNIT liability using the fixed-dollar limitation.9 To remedy the due process violation, the court required that GM be fully refunded the tax paid as a result of the NLC deduction limitation.
After the GM decision, Alcatel-Lucent asked the Commonwealth Court to reconsider its initial decision that the company was not entitled to a $2 million refund after the Department declined to retroactively apply Nextel. The Court considered the issue of whether the holding of GM applied to pre-2017 tax years under which the percentage limitation of the NLC provision was still in place. In ordering that a refund be granted, the Court noted that it was constrained by the Pennsylvania Supreme Court’s GM decision finding that Nextel applies retroactively. The Court noted, however, that Alcatel-Lucent correctly paid tax in conformity with the percentage limitation, which was upheld in Nextel.
The Court further acknowledged that the due process analysis used in GM also applied in this case, noting the requirement that the tax positions of all taxpayers be equalized. Specific to the 2014 tax year, the Court noted that more than 13,000 corporate taxpayers (the vast majority of the overall number of corporate taxpayers carrying net losses into 2014) paid no tax because their income did not exceed the fixed-dollar limitation. Those taxpayers could not be reassessed because the tax year is closed under the statute of limitations. Therefore, the Court concluded, “the only way to equalize the position of Taxpayer with favored taxpayers is to allow Taxpayer a full net loss deduction, like the other taxpayers enjoyed.”
Adopting the same framework and reasoning as in the GM case, the Court concluded that Alcatel-Lucent was entitled to a refund under due process principles and remanded the case to the Pennsylvania Board of Finance and Revenue to issue a refund. On Jan. 18, 2023, the Commonwealth filed a notice of appeal with the Pennsylvania Supreme Court, taking exception to the Commonwealth Court’s conclusion that Nextel applies retroactively to all tax years.10
Alcatel-Lucent is yet another Pennsylvania court decision that attempts to balance the application of the historically restrictive NLC deduction with the state’s requirement that taxpayers be treated in a uniform manner. In this case, the Commonwealth Court granted a refund to allow for a full NLC deduction that was limited by the percentage limitation of Pennsylvania’s NLC provision, even though the percentage limitation was found constitutional under Nextel and continues to apply for post-2017 tax years. This decision serves to apply the Pennsylvania Supreme Court’s decision in GM, which established that Nextel should be applied retroactively to pre-2007 tax years when the percentage limitation was not in place, and that a refund would best remedy the due process violation of taxpayer rights under U.S. Supreme Court case law. Alcatel-Lucent adds another layer of complexity in that the taxpayer correctly paid CNIT during the 2014 tax year using the percentage limitation but subsequently requested a refund following Nextel and filed exceptions to the Commonwealth Court’s initial decision following GM. The relief prescribed by the Commonwealth Court comes directly as a result of the Department’s administrative decision not to apply the Nextel decision to pre-2017 tax years. Had the Department applied the court’s decision to the open years, it most likely would have avoided the due process violation subsequently raised in Alcatel-Lucent.
If affirmed by the Pennsylvania Supreme Court, the holding in Alcatel-Lucent would only apply to tax years prior to 2017, which would generally be closed under the state’s three-year statute of limitations. For now, Alcatel-Lucent confirms that the GM due process analysis may be extended to apply to the utilization of NLCs from the 2007 through 2016 tax years in which both the fixed-dollar limitation and percentage limitation were in effect. Should the decision be upheld on appeal, there may be refund opportunities for taxpayers whose net loss deductions were limited based on the percentage limitation for pre-2017 tax years and that filed protective refund claims for those years, unless the tax year is otherwise open under audit or appeal. These taxpayers will need to consider the impact of the Alcatel-Lucent decision in conjunction with any utilization of NLCs in later years.
1 Alcatel-Lucent USA Inc. v. Commonwealth, No. 803 F.R. 2017, Pennsylvania Commonwealth Court, Dec. 28, 2022.
2 72 Pa. Stat. § 7401(3)4.(c)(1)(A)(V).
3 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.” Pa. Const. art. VIII, § 1.
4 Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 171 A.3d 682 (Pa. 2017).
5 Corporation Tax Bulletin 2018-02, Net Operating Loss (NOL) Deduction Application of Nextel Communications v. Commonwealth, Pennsylvania Department of Revenue, May 10, 2018.
6 Alcatel-Lucent USA Inc. v. Commonwealth, No. 803 F.R. 2017, Pennsylvania Commonwealth Court, Sept. 13, 2021. For further discussion of this decision, see GT SALT Alert: Pennsylvania denies refund related to NLC limitation.
7 General Motors Corp. v. Commonwealth, 265 A.3d 353 (Pa. 2021). For further discussion of this decision, see GT SALT Alert: Pennsylvania severs net loss carryover provision.
8 Citing Chevron Oil Co. v. Huson, 404 U.S. 97 (1971).
9 Quoting McKesson v. Florida Division of Alcoholic Beverages, 496 U.S. 18 (1990).
10 Alcatel-Lucent USA Inc. v. Commonwealth, No. 8 MAP 2023, Pennsylvania Supreme Court, filed Jan. 18, 2023.
Matthew D. Melinson
Matthew Melinson is a partner in Grant Thornton's Philadelphia office and the national leader of the SALT practice's indirect tax services. Melinson is responsible for all aspects of multistate tax consulting and planning and compliance related to income tax, franchise tax, sales and use tax, credits and incentives, real estate tax, and personal property tax.
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Drew VandenBrul has over 26 years of experience as a state & local tax professional advising companies across all industries on complex Pennsylvania and multistate tax planning, tax controversy, transaction and compliance matters, including income, franchise, realty transfer and sales & use taxes.
- Real estate and construction
- Private equity
- State and local tax
Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
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