State and Local Taxation: Nextel, Slight Reprise

PA TaxOne of the more important Pennsylvania tax cases decided last year was Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 129 A.3d 1 (Pa. Commw. 2015). Decided under the Corporate Net Income Tax, Nextel held that the net loss carryover provision of 72 P.S. § 7401(3)4.(c)(1)(A) violated the Uniformity Clause of the Pennsylvania Constitution because it treated taxpayers with small operating losses more favorably by permitting them to offset their losses against all of their taxable income, while taxpayers with large losses could not. Nextel, 129 A.3d at 9. Specifically, in the 2007 tax year, which was at issue in Nextel, taxpayers could deduct the greater of $3,000,000 or 12.5% of taxable income. 72 P.S. § 7401(3)4.(c)(1)(A)(ii). Consequently, a taxpayer whose income was $3,000,000 or less could use losses from prior years to reduce its taxable income to zero, while a taxpayer whose income was higher was still subject to tax. The Commonwealth Court concluded that this disparity was unconstitutional. Nextel, 129 A.3d at 9; see also id., 129 A.3d at 13-14 (Pelligrini, J. concurring and dissenting).

Based upon that violation, the Commonwealth Court majority concluded that a refund to Nextel was the only practical remedy. Nextel, 129 A.3d at 13. There was language in the majority’s opinion, however, limiting the scope of its holding: “we fully recognize that our decision in this case could be far-reaching. Nonetheless, our analysis and remedy is appropriately confined to the Commonwealth, Nextel, and the 2007 Tax Year.” Id. (emphasis supplied). Still, most commentators viewed the implications of Nextel to be far-reaching, a view that was shared by the dissenting judges.

Recently, the Commonwealth Court again dealt with the net loss carryover provision, and it again held that the provision was unconstitutional because it created two classes of taxpayers, one of which could offset 100% of its taxable income and one of which could not. RB Alden Corp. v. Commonwealth, No. 73 F.R. 2011, 2016 Pa. Commw. LEXIS 278, *38 (Pa. Commw. June 15, 2016). The court granted the taxpayer the same remedy provided in Nextel, and directed the Department of Revenue to recalculate the taxpayer’s corporate net income tax “without capping the amount that it can take on its net loss carryover.” Id. at *40. For good measure, the Commonwealth Court opinion was authored by Senior Judge Pellegrini, who had dissented in Nextel over the propriety of that very remedy. Nextel, 129 A.3d at 14-16 (Pelligrini, J. concurring and dissenting).

Ultimately, the Supreme Court of Pennsylvania will have the final word, but for now, corporate taxpayers should be filing returns on the assumption that the net loss carryover is uncapped and with appropriate disclosure of that position. Moreover corporate taxpayers with large losses who were restricted by the cap in prior years may wish to consider filing refund claims.

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