On September 21, 2018, nearly one year after issuing its opinion in Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth,¹ the Pennsylvania Supreme Court (the Court) issued a per curiam order in R.B. Alden Corp. v. Commonwealth² (the Order) vacating and remanding the case to the Commonwealth Court "for reconsideration in light of this Court's decision in Nextel[.]"

Factual background

During the year ended June 30, 2007 (a year in which the statute limited the net loss carryforward to $2 million and did not contain any percentage limitation) R.B. Alden sold a portion of its interest in a limited partnership and recognized approximately $30 million of gain (the Gain). On its federal return, R.B. Alden offset the Gain with $5.4 million of current-year operational losses from the partnership. On its Pennsylvania corporate tax return, R.B. Alden reported the Gain as nonbusiness income. The Pennsylvania Department of Revenue issued an assessment asserting that the Gain was business income, but permitted R.B. Alden to deduct the $5.4 million of current year losses and a $2 million net loss carry forward.

Procedural background

In addition to claiming that the $2 million net loss carryforward limitation (Dollar Cap) violates the Uniformity Clause of the Pennsylvania Constitution, R.B. Alden argued at the Commonwealth Court and at the Supreme Court that:

1. The Gain was nonbusiness income

2. The Gain was "multi-form" and unrelated to R.B. Alden's activities in Pennsylvania and should, therefore, be excluded from its Pennsylvania taxable income

3. The gross proceeds from the Gain should be sourced to R.B. Alden's commercial domicile of New York

4. The tax benefit rule precludes the inclusion of the Gain in R.B. Alden's taxable income

The Commonwealth Court unanimously ruled in favor of the Commonwealth on these issues but held (under its decision in Nextel³) that the Dollar Cap is unconstitutional. On cross appeals by both parties, the Court vacated the Commonwealth Court's decision and remanded the matter to the Commonwealth Court for reconsideration in light of the Court's decision in Nextel.

The Nextel decision

In Nextel, the Court held that the Dollar Cap:

1. Violates the Uniformity Clause of the Pennsylvania constitution "as applied" to Nextel

2. Must be severed from the statute

For more on the Court's Nextel ruling, see Tax Alert 2017-1763.

Some points to consider on remand

In Nextel, the Court did not address the validity of the percentage cap. This issue appears in several other cases that are working their way through the courts.

As discussed in Tax Alert 2017-1763, the Nextel Court precluded Nextelfrom receivingany benefit by severing the Dollar Cap and leaving the percentage cap in place. If, on remand, the Commonwealth Court were to adopt the Court's Nextel remedy, however, R.B. Alden would receive a full refund because the statute in the year at issue only limited net loss carryforwards by the Dollar Cap and did not contain a percentage cap. Therefore, applying the Nextel remedy to R.B. Alden would give R.B Alden full relief even though that same remedy gave Nextel no relief. This potentially paradoxical result raises questions about whether the Commonwealth Court — and the Court on the inevitable appeal — might seek to avoid this outcome. One way the Commonwealth Court could avoid this paradox would be to distinguish R.B. Alden's facts from those considered in Nextel because the Court in Nextel held that the Dollar Cap violated the Uniformity Clause "as applied" to Nextel's facts only, as opposed to being a "facial" violation applicable to all taxpayers. The concurring opinion in Nextel, which pointed out that it would be difficult for the Court to reach a different decision for any other taxpayer,⁴ poses a significant obstacle to taking this route.

Finally, in the Nextel oral argument, members of the Court probed whether it was possible to grant only prospective relief. The Court's decision, however, did not step into the quagmire of whether its Mount Airy decision could be read to allow only prospective relief.⁵ Therefore, the Commonwealth Court also could use a "prospective only" remedy to deny granting relief on remand.

———————————————

———————————————
ENDNOTES

¹ 6 EAP 2016.

² 66 MAP 2017.

³ Nextel Communications of Mid — Atlantic, Inc. v. Commonwealth, 129 A.3d 1 (Pa. Cmwlth. 2015).

⁴ Nextel v. Commonwealth, Concurring Slip Op. at 2. (Baer, J., concurring)(finding that "that the distinction between an "as-applied" and a "facial" challenge as being "arguably meaningless in this case given the future effect of [the] decision."); Justice Baer, Donohue and Wecht, also clarified in the concurring opinion, that the holding of this decision "declares the [Dollar Cap] unconstitutional on its face." Id.

⁵ Mount Airy #1 v. Pa. Dept. of Rev., 154 A.3d 268 (Pa. 2016).