In late 2019, the Pennsylvania Commonwealth Court rendered two important decisions involving the Pennsylvania Supreme Court’s precedential opinion in Nextel Communications of the Mid-Atlantic v. Commonwealth  where the court found that flat-dollar net loss carryforward (“NLC”) deductions from the Corporate Net Income Tax (CNIT) violated the Uniformity Clause of the Pennsylvania Constitution.
In General Motors Corporation (GM) v. Commonwealth and RB Alden Corp v. Commonwealth (RB Alden), the Commonwealth Court followed Nextel and found that a flat-dollar NLC violated the PA Constitution; however, the Court applied the ruling retroactively and allowed a full refund of CNIT paid for tax years 2001 and 2006 – which departed from Nextel, where the refund claim was denied.
The Nextel opinion involved the 2007 tax year when the PA CNIT statute limited NLC deductions to the greater of the $3 million flat-dollar NLC cap or 12.5% of taxable income. After the court found that the flat-dollar NLC deduction violated the Uniformity Clause, the Court severed the flat-dollar cap while allowing the 12.5% of taxable income cap deduction to remain.
However, In GM and RB Alden, the tax years at issue were 2001 and 2006, respectively. During these tax years, the PA CNIT statute had a flat-dollar NLC cap at $2 million with no percentage of taxable income cap NLC deduction available. One of the main issues the Commonwealth Court considered concerned whether severance of the flat-dollar NLC cap was the proper remedy when no income percentage NLC cap would remain intact and applicable.
Since the parties stipulated that the flat-dollar NLC cap violated the Uniformity Clause, the Commonwealth Court had to decide between either severing the flat-dollar cap deduction or eliminating the NLC deduction altogether. The Commonwealth argued that the intention of the legislature was to not allow an unlimited NLC deduction for corporate taxpayers, while the taxpayers argued that Nextel set a precedent for severance of the flat-dollar NLC cap, ultimately leaving an unlimited NLC deduction. Ultimately, the Commonwealth Court sided with the taxpayers and found that the dominant public policy underlying the NLC deduction was to promote business investment in the Commonwealth and therefore severed the flat-dollar cap leaving the NLC deduction to be unlimited.
Further, the Court analyzed whether the refunds were to be granted retroactively for the 2001 and 2006 tax years even while the applicable statutory period for refund claims had lapsed. The Commonwealth Court looked to the three-prong test established by the U.S. Supreme Court in Chevron Oil Company v. Huson, the same analysis used in Nextel, to determine whether retroactivity would be applied. The Chevron three-prong test looked at: (1) whether the decision establishes a new principle of law; (2) whether retroactive application of the decision will further the operation of the decision; and (3) the relevant equities. The Court found that it was clear that the flat-dollar NLC cap violated the Uniformity Clause and it merely applied well established case law in doing so, thus satisfying the first prong. Next, the Court reasoned that severing the flat-dollar NLC cap neutralized the non-uniform treatment among taxpayers, satisfying the second prong. Lastly, the Court found that the Commonwealth failed to meet its burden in proving that applying retroactivity to the refund claims would cause significant fiscal harm to the Commonwealth. The Court noted that the potential negative fiscal impact of those claims is offset by the applicable three-year statute of limitations, and applied the reasoning [JCF1] that Nextel could cause an increase in CNIT revenue with the percentage NLC cap remaining. Ultimately, the Commonwealth Court held that the taxpayers were entitled to full refunds for the 2001 and 2006 years.
The main implications for corporate taxpayers are that for tax years where there is only a flat-dollar NLC cap deduction, taxpayers are entitled to a full CNIT refund. There are, however, some serious obstacles before the taxpayers receive refunds. First, the three-year statute of limitations limits the class of taxpayers eligible. Also, it is very likely that the Commonwealth will appeal to the Pennsylvania Supreme Court, which could find against rewarding the taxpayer refunds much like it did in Nextel.
 Chevron Oil Company v. Huson, 404 U.S. 97 (1971).
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