Pennsylvania net loss carryover unconstitutional, remedy retains limit

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October 2017


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 takeaway

The Nextel decision raises a number of open questions for Pennsylvania taxpayers:

  • Given that the decision addresses an as-applied constitutional challenge, and a concurring opinion joined by two justices that claims the challenge necessarily implicates the facial validity of the NLC, does the cap removal apply to all taxpayers?
  • What are the next steps for taxpayers with refunds pending at the Board of Appeals or Board of Finance and Revenue?
  • What should calendar year taxpayers do for purposes of completing their 2016 Pennsylvania tax returns? The forms do not reflect the removal of the cap. Further, many taxpayers may not be adequately paid in for extension and estimate purposes if they relied upon the flat dollar cap to calculate estimates or extensions. Finally, how do taxpayers complete their RCT-103 NOL schedules?
  • Will the Department assess tax for open years on taxpayers that benefited from the flat dollar cap?
  • What are the financial statement impacts? Taxpayers may need to re-evaluate deferred tax assets and valuation allowances on Pennsylvania NOLs. Additionally, taxpayers that have used the flat dollar cap in prior years open under statutes of limitations may need to consider ASC 740 reserves or filing amended returns for those open tax years.
  • What are the next steps for taxpayers taking the Nextel position on originally filed returns open under statute of limitations?

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).

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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