Pennsylvania: NOL flat-dollar cap violated uniformity | KPMG United States
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Pennsylvania: NOL flat-dollar cap held to violate uniformity clause

Pennsylvania: NOL flat-dollar cap violated uniformity

The Pennsylvania Supreme Court today affirmed a commonwealth court decision holding that the flat-dollar net loss (NOL) deduction limitation in effect for the tax year at issue violated the “uniformity clause” of the Pennsylvania Constitution as applied to a particular taxpayer.


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However, the high court reversed the lower court’s holding that the appropriate remedy was to allow the taxpayer to apply an uncapped net loss deduction and to refund the tax paid as a result of the unconstitutional cap. In the high court’s view, the legislature intended to limit the net loss deduction, and the appropriate remedy was to sever the flat-dollar cap deduction limitation. 


The case is: Nextel Communications of the Mid-Atlantic, Inc. v. Pennsylvania, No. 6 EAP 2016 (Pa. October 18, 2017). Read the opinion [PDF 257 KB]

KPMG observation

The taxpayer has 14 days to request re-argument before the Pennsylvania Supreme Court and could potentially also file a petition for certiorari before the U.S. Supreme Court. Barring those occurrences, the decision would appear to be final, and the Department of Revenue could assess any taxpayer that took a position inconsistent with the holding. 

There are taxpayers that filed original returns or amended returns applying an uncapped NOL. Tax professionals believe it may be likely that the Department would assess taxpayers that took this position on original returns, and would deny refunds related to amended returns applying an uncapped NOL.  Corporate taxpayers with similar appeals pending at the Board of Appeals and/or Board of Finance and Revenue need to consider whether to withdraw these appeals. 

There are also taxpayers that filed as provided for by law and benefitted from the flat-dollar cap in tax years that are currently open and that would owe additional tax if the percentage cap was applied. Corporate taxpayers that took either an uncapped net loss deduction or a net loss deduction based upon the flat-dollar limitation need to consider the potential tax provision impact. However, it may be appropriate for those that used the flat-dollar cap to wait before filing amended returns. The Department may issue guidance on how it intends to apply the holding and/or the Pennsylvania legislature may address the issue.  

There is already legislation pending that would prospectively revise the net loss deduction limitations. On October 17, 2017, the Pennsylvania House approved House Bill 542 to fund the FY 2017-2018 budget. The bill now goes to the Senate for concurrence. The bill would repeal the flat-dollar cap entirely and would amend the net loss deduction for tax years beginning after December 31, 2017, to 35% of taxable income and for tax years beginning after December 31, 2018, to 40% of taxable income. In light of the holding in today’s decision, it could be possible that the bill would be amended to address tax prior tax years. 


Read an October 2017 report [PDF 112 KB] prepared by KPMG LLP

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