UPDATE: Nextel filed an Application for Reargument with Application for Consolidation with R.B. Alden Corp. v. Commonwealth, 60 MAP 2017 or with Application for Remand to Correct a Factual Error on November 1, 2017. On January 4, 2018, the Pennsylvania Supreme Court issued an order denying Nextel’s Application for Reargument.
Further, H.B. 542 (enacted October 30, 2017, click here for our Insight), amends Section 401(3)4(C) to remove the fixed dollar cap (currently $5 million) and increase the percentage limitation (currently 30% of taxable income) to 35% of taxable income for tax years beginning after December 31, 2017, and 40% of taxable income for tax years beginning after December 31, 2018. The legislation provides that the amendments to Section 401(3)4(C) shall take effect on the date that the Pennsylvania Bulletin publishes the Secretary of Revenue’s notice that a Pennsylvania Supreme Court decision has deemed all or part of the net loss deduction unconstitutional.
On January 27, 2018, such notice was published in the Pennsylvania Bulletin, thus making applicable the 35% limitation for tax years beginning after December 31, 2017, and the 40% limitation for tax years beginning after December 31, 2018.
On October 18, 2017, the Pennsylvania Supreme Court held that the net loss carryover (NLC) deduction allowed for purposes of the Pennsylvania corporate net income (CNI) tax, as applied to Nextel Communications, violates the Uniformity Clause of the Pennsylvania Constitution.
For the 2007 tax year at issue, the NLC deduction was limited to the greater of 12.5% of the taxpayer’s taxable income or $3 million.
The court concluded the NLC deduction creates classes of taxpayers according to their taxable income. Taxpayers with taxable income in excess of $3 million could not reduce their CNI liability to zero whereas similarly-situated taxpayers with $3 million or less in taxable income could reduce their CNI liability to zero.
The court sought to apply a remedy that would be most consistent with the legislature’s intent in enacting the NLC. The court determined that striking down the fixed dollar limitation, while retaining the percentage limitation, would be most consistent with the legislature’s intent to have the NLC balance the twin policy objectives of encouraging investment and ensuring that the Commonwealth’s financial health is maintained.
The Nextel decision raises a number of open questions for Pennsylvania taxpayers:
Taxpayers should be aware that there are several pending matters in litigation challenging the NLC, including an appeal from the Commonwealth Court’s decision in RB Alden (click here for our summary of the Commonwealth Court’s decision).