Pennsylvania NOL cap appealed to U.S. Supreme Court

May 09, 2018
May 09, 2018
0 min. read

On May 3, 2018, Nextel filed a petition for writ of certiorari with the U.S. Supreme Court, requesting review of the Pennsylvania Supreme Court’s decision in Nextel Communications of the Mid-Atlantic, Inc. v. Commwealth. A petition for reargument was denied by the Pennsylvania court in early January.   

Since 2007, the Pennsylvania net operating loss provision was capped with either a flat cap of $2 or $3 million, or a percentage of taxable income cap of 12.5 percent to 30 percent depending on the tax year. In Nextel, the Pennsylvania Supreme Court held the flat cap violated the Pennsylvania Uniformity Clause and the appropriate remedy was to strike the flat cap from the statute. However, Nextel argues that the appropriate relief is to uncap the losses and allow full utilization of the net operating loss up to, but not exceeding, taxable income. 

Similarly in R.B. Alden Corp. v. Commonwealth, the Pennsylvania Commonwealth Court held that the net operating loss flat cap was unconstitutional because of the decision in Nextel. Unlike Nextel, however, the result of R.B. Alden is that the taxpayer’s net operating loss for the 2006 tax year was uncapped as there was no percentage cap provision for the 2006 tax year (or earlier years). R.B. Alden has been appealed to the Pennsylvania Supreme Court. 

In addition to the Nextel and R.B. Alden cases, the Pennsylvania legislature recently amended the net operating loss provisions and eliminated the flat cap for tax years beginning on or after Jan. 1, 2018. The legislature also increased the percentage cap to 35 percent for 2018 and 40 percent for 2019 and forward. Additionally, the Department of Revenue has administratively announced, through Corporate Tax Bulletin 2017-01, that it will not permit the flat cap for the 2017 tax year, and will only apply the 30 percent cap for the 2017 tax year. 


Taxpayers should continue to monitor both the Nextel and R.B. Alden litigation. The application of these cases and recent statutory amendments impact financial statements and cash tax planning. Taxpayers that have filed protective refund petitions based upon the elimination of the net loss carryover cap in its entirety are likely to have their petitions held in abeyance of Nextel. Conversely, taxpayers that have utilized only the fixed dollar amount, or a portion thereof, of the net loss carryover deduction for any open tax periods may receive assessments based upon the application of the percentage of income cap. Also, there continues to be an opportunity to file protective claims for any open tax periods. 

Corporate taxpayers utilizing the net loss carryforward in Pennsylvania should contact their tax advisors to consider next steps in light of the Nextel and RB Alden litigation.

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