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Pennsylvania denies refund related to NLC limitation

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On Sept. 13, 2021, the Pennsylvania Commonwealth Court ruled that a taxpayer was not entitled to a refund of corporate net income tax (CNIT) paid for the 2014 tax year when the taxpayer’s use of net loss carryovers (NLCs) was limited by the state’s percentage limitation for net loss deductions.1 In denying the refund, a three-judge panel found that the Pennsylvania Supreme Court’s decision in Nextel Communications of the Mid-Atlantic v. Commonwealth,2 which struck down a flat dollar limitation on NLC deductions, does not require a retroactive elimination of the percentage limitation based on the taxpayer’s income. Instead, the Court ruled that prospective application of Nextel to the taxpayer’s facts did not violate the Uniformity and Remedies Clauses of the Pennsylvania Constitution, or the Due Process or Equal Protection Clauses of the U.S. Constitution.

Background The taxpayer, a Delaware corporation that provides IP networking, broadband access and cloud technology services, carried a substantial amount of net losses into the 2014 tax year as permitted under Pennsylvania law. In 2014, the taxpayer had taxable income apportioned to Pennsylvania in the amount of approximately $27 million before any net loss deductions. During the 2014 tax year, Pennsylvania’s NLC deduction limitation was the greater of 25% of taxable income or $4 million.3 Utilizing the percentage limitation, the taxpayer took a net loss deduction of approximately $6.8 million, resulting in a CNIT liability of approximately $2 million, which the taxpayer paid in full.

The taxpayer later filed a petition with the Pennsylvania Board of Appeals (BOA), seeking a refund of the $2 million in tax paid for the 2014 tax year. The taxpayer argued that the statutory NLC deduction provision violated the Pennsylvania Uniformity Clause because the taxpayer owed tax while similarly situated taxpayers did not, resulting in variable effective tax rates.4 The BOA denied the refund request, declining to address the taxpayer’s constitutional issues. On appeal, the Pennsylvania Board of Finance and Revenue (BF&R) also denied the refund request, finding that Pennsylvania law did not authorize a greater NLC deduction than the 25% deduction utilized on the taxpayer’s 2014 corporate tax report. The BF&R similarly declined to rule on the validity of Pennsylvania’s NLC deduction provision as an administrative tribunal.

The Nextel decision In October 2017, shortly after the taxpayer appealed the decision to Commonwealth Court, the Pennsylvania Supreme Court decided Nextel, holding that the flat-dollar limitation portion of Pennsylvania’s NLC provision as it existed in 2007 violated the Pennsylvania Uniformity Clause.5 The Supreme Court reasoned that the NLC statute violated uniformity because some taxpayers could eliminate their tax liability while similarly situated taxpayers were required to pay tax. In fashioning a remedy, the court severed the flat-dollar cap from the NLC provision while preserving the percentage cap portion. This remedy left Nextel in the same financial position because it was still subject to the percentage limitation instead of being allowed an unlimited NLC deduction as it requested. In response to the Nextel decision, the Pennsylvania Department of Revenue issued a bulletin clarifying its policy to apply Nextel on a prospective basis, meaning that it would not reassess corporations utilizing the flat-dollar limitation for tax years beginning prior to Jan. 1, 2017.6

Commonwealth Court decision Before the Commonwealth Court, the taxpayer alleged that the Department violated Pennsylvania’s Uniformity Clause by applying the statutory percentage cap on net loss deductions to large corporations while refusing to apply the same cap to smaller corporations. Alternatively, the taxpayer argued that it was entitled to a remedy under the Due Process and Equal Protection Clauses of the U.S. Constitution and the Remedies Clause of the Pennsylvania Constitution.

Prospective application of Nextel does not violate uniformity The taxpayer argued that the Department’s prospective application of Nextel violated uniformity principles because it allowed smaller corporations to fully deduct their losses in prior years while larger corporations including the taxpayer could only deduct a percentage of theirs. In the taxpayer’s view, the suitable remedy would be to treat the taxpayer the same as the small corporations by allowing a full deduction of net losses without the percentage cap.

Recognizing that the taxpayer’s argument was premised on the Department’s duty to apply Nextel on a retroactive basis, the Court addressed the question of whether Nextel in fact should be applied retroactively. In undertaking this analysis, the Court applied the following three-factor test established by the U.S. Supreme Court in Chevron Oil Company v. Huson: (i) whether the decision establishes a new principle of law; (ii) whether retroactive application of the decision would further the operation of the decision; and (iii) whether the equities favor retroactivity.7

After reviewing the relevant case law on the subject, the Court determined that Nextel satisfied the first prong of the Chevron test for the same reasons stated in General Motors Corporation v. Commonwealth, a Commonwealth Court case that severed the fixed-dollar limitation from the NLC deduction statute for the 2001-2006 tax years and allowed the taxpayer to take an unlimited NLC deduction because there was no percentage limitation in place during those tax years.8 In General Motors, the Court determined that the Pennsylvania Supreme Court did not apply a new principle of law in Nextel, but instead applied a long-standing principle that tax uniformity prohibits classification based on the amount of income.

Turning to the second prong of the Chevron test, the Court determined that retroactive application would not forward the operation of the Nextel decision in the present case. The Court noted that the taxpayer correctly utilized the percentage cap of the NLC provision, which was upheld in Nextel. As such, the Court concluded that the taxpayer’s proposed avoidance of the percentage cap in order to reduce its tax liability to $0 did not further the Nextel decision.

Finally, the Court addressed the third prong of the Chevron test, pointing out that the Pennsylvania Supreme Court has considered this prong to be the most significant of all three prongs of the test. In weighing the equities between impacted taxpayers, the Court determined that “[r]etroactively assessing thousands of taxpayers that justifiably relied upon the legality of the flat-dollar limitation prior to the Nextel decision would produce a substantially inequitable result.” For these reasons, the Court found that the Chevron test did not support a retroactive application of Nextel in the present case, meaning that the decision would only be applied prospectively. Accordingly, the Court concluded that the taxpayer paid the correct amount of tax in 2014 and was not entitled to a refund.

Due Process, Equal Protection and Remedies Clause arguments The Court next considered the taxpayer’s arguments for relief under the Due Process and Equal Protection Clauses of the U.S. Constitution and the Remedies Clause of the Pennsylvania Constitution, which require “meaningful backward-looking relief” so that the relative position of the taxpayer is equivalent to the position occupied by favored taxpayers.9 Under a due process analysis, the Court determined that the taxpayer was not denied property and should not be entitled to a refund based on “an unlawful deduction.” The Court therefore found no due process violation by applying Nextel on a prospective basis.

Moving to the taxpayer’s equal protection argument, the Court noted that tax statutes are to be applied in a nondiscriminatory fashion under the Equal Protection Clause. Further, 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 Acknowledging that the flat-dollar limitation in Nextel created a non-uniform classification under Pennsylvania law, the Court noted that the discrimination was removed when the Pennsylvania Supreme Court severed such limitation. Therefore, the Court concluded that prospective application of Nextel did present an equal protection violation.

Finally, the Court turned to the taxpayer’s argument for relief under the Remedies Clause, which guarantees a remedy to injured persons by “due course of law.”11 In General Motors, the Court held that the Remedies Clause is satisfied where a taxpayer exercises its rights by seeking relief in open courts. In the present case, the Court found that the taxpayer’s rights under the Remedies Clause were met because it was able to pursue a tax refund through the statutorily prescribed administrative review process and the judicial appeal process. Accordingly, the Court found no Remedies Clause violation.

Commentary This NOL case represents the latest decision in a long line of uniformity cases recently considered by Pennsylvania courts, which have generally applied a rigid interpretation of the state’s Uniformity Clause. In addition to Nextel and General Motors, the Pennsylvania Supreme Court has strictly interpreted tax uniformity principles in other areas of Pennsylvania taxation, including property taxes and gaming taxes. For example, the state high court ruled that the Uniformity Clause prohibited a school district from selectively appealing the tax assessments of commercial properties while passing over the assessment appeals of residential properties.12 Similarly, the court held that the local share assessment imposed under the state’s Gaming Act violated uniformity because it imposed grossly unequal local share assessments upon similarly licensed casinos located outside of Philadelphia based on gross terminal revenue.13

From a CNIT perspective, the Court’s decision is significant as it highlights the limitations of applying the Pennsylvania Supreme Court’s landmark Nextel decision to all tax years based on the structure of the NLC provision and the taxpayer’s particular facts and circumstances. It is important to note that the Court applied Nextel retroactively to the 2001-2006 tax years in General Motors, finding that the taxpayer met all three prongs of the Chevron test. However, there were important factual distinctions in General Motors that warranted relief in that case, including the fact that the NLC deduction for the tax years at issue was limited to the flat-dollar deduction only. The Court found that the deduction created a non-uniform classification based solely on whether the taxpayer’s income exceeded $2 million, the amount of the cap that applied for tax years beginning before 2007.14 As such, the Court determined that severing the flat-dollar deduction for these periods would ultimately further the Nextel decision, finding that the equities weighed in favor of the taxpayers.

In contrast, the taxpayer in the present case paid tax in 2014 using the percentage cap, which was not available to the taxpayers in General Motors and was ultimately upheld in Nextel. Finding that the taxpayer correctly paid tax using the NLC deduction provision, the Court suggested that the taxpayer could not use Nextel to its advantage by avoiding the percentage cap altogether. Ultimately, the existence of the percentage limitation was a crucial distinction leading to a denial of the taxpayer’s requested refund.

Since it is unclear whether the taxpayer will file exceptions to or appeal the Court’s decision, this may not be the final interpretation that taxpayers see with respect to how the NLC deduction should be applied. Meanwhile, a final decision on the General Motors case is currently pending before the Pennsylvania Supreme Court, with oral arguments having taken place in March 2021. The primary issue on appeal in that case is the reconciliation of the different remedies and resulting outcomes reached in the jurisprudence addressing the NLC deduction since Nextel, despite the same uniformity violations found in different tax years.



1 Alcatel-Lucent USA Inc. v. Commonwealth of Pennsylvania, No. 803 F.R. 2017, Pennsylvania Commonwealth Court, Sept. 13, 2021.
2 171 A.3d 682 (Pa. 2017).
3 72 PA. STAT. § 7401(3)4.(c)(1)(A)(V).
4 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.
5 For further 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.
6 Corporation Tax Bulletin 2018-02, Net Operating Loss (NOL) Deduction Application of Nextel Communications v. Commonwealth, Pennsylvania Department of Revenue, May 10, 2018.
7 404 U.S. 97 (1971).
8 222 A.3d 454 (Pa. Commw. 2019). General Motors is distinguishable from the Alcatel-Lucent case because the NLC deduction at issue in General Motors contained only the flat-dollar deduction, not the percentage limitation. The Court determined that General Motors was nonetheless instructive with respect to whether Nextel should apply retroactively or prospectively in this case. For further discussion of the General Motors case, see GT SALT Alert: Pennsylvania rules on net loss carryover deduction.
9 Quoting 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 PA. CONST. art. 1, § 11.
12 Valley Forge Towers Apartments, LP v. Upper Merion School District, 163 A.3d 962 (Pa. 2017).
13 Mt. Airy #1 LLC v. Pennsylvania Department of Revenue, 154 A.3d 268 (Pa. 2016).
14 72 PA. STAT. § 7401(3)4.(c)(1)(A)(I).



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