United States

Net loss carryforward cap violates Pennsylvania Constitution


On Nov. 23, 2015, the Pennsylvania Commonwealth Court issued its decision in Nextel Communications of Mid-Atlantic, Inc. v. Commonwealth of Pennsylvania, ruling the state’s cap on the use of net loss carryforwards to the greater of $3M or 12.5 percent of taxable income for the year in question violated the Uniformity Clause of the Pennsylvania Constitution.

In its decision, the Commonwealth Court made the following determinations regarding the cap on net loss carryforwards:

  1. The cap creates two classifications of taxpayers based solely on the amount of taxable income.
  2. The classifications based only on the amount of taxable income is “unjust, arbitrary, and illegal.”
  3. The legislature’s intent does not undo, cure or mitigate the fact it enacted an unconstitutional provision.
  4. A 20-year carryforward of net losses does not cure the issue in a particular tax year.
  5. The appropriate remedy is to strike the cap on the use of the net loss carryforward deduction, and not strike all the net loss provisions.

The Commonwealth Court’s decision comes as a surprise, considering the issue and potential fiscal impact. However, it appears the court reached the correct conclusion based upon the precedent established in In re Cope’s Estate, 43 A. 79 (PA 1899) in which the court held classifications based solely on “a difference in quantity of precisely the same kind of property” violates the Uniformity Clause.  

It is likely that the state will file an appeal with the Pennsylvania Supreme Court, and that this issue will remain uncertain for some time to come. Taxpayers with pending refund claims should continue to hold those claims in abeyance until a final decision has been rendered in this matter, while taxpayers with claims that have not yet filed should consider filing those claims. Additionally, taxpayers filing returns impacted by the net loss cap should consider whether to apply the cap and file a protective refund claim or follow the Commonwealth Court’s ruling in filing their original return.






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