02 December 2019 Pennsylvania Commonwealth Court fully refunds taxpayers' 2001 and 2006 taxes after severing flat dollar cap on NLC deductions from CNIT statute In General Motors Corporation (GM)1 and RB Alden Corp. (RB Alden),2 a 2-1 divided panel of the Pennsylvania Commonwealth Court (court) severed Pennsylvania's flat dollar cap on net loss carryforward (NLC) deductions from the Corporate Net Income Tax (CNIT) statute after finding the cap unconstitutional. The court also granted the taxpayers a full refund of CNIT paid for tax years 2001 and 2006. In 2017, the Pennsylvania Supreme Court held in Nextel Communications of the Mid-Atlantic, Inc. (Nextel)3 that Pennsylvania's $3 million cap on NLC deductions violated the Uniformity Clause of the Pennsylvania Constitution, which requires similar treatment of similarly-situated taxpayers. Nextel involved the 2007 tax year, when the CNIT statute limited NLC deductions to the larger of $3 million (a Flat Dollar NLC Cap) or 12.5% of taxable income (a Percentage NLC Cap). The Pennsylvania Supreme Court remedied the violation by severing the unconstitutional Flat Dollar NLC Cap from the CNIT statute, leaving the Percentage NLC Cap intact. The GM and RB Alden cases, however, involve the 2001 and 2006 tax years. For these years, the CNIT statute limited NLC deductions to a flat $2 million. GM and RB Alden (collectively, taxpayers) raised the same issue — whether to sever the unconstitutional Flat Dollar NLC Cap in a year when no Percentage NLC Cap applied. (The parties agreed that the Flat Dollar NLC Cap violates the Uniformity Clause of the Pennsylvania Constitution.) To cure the Uniformity Clause violation, the court found that it must either sever the Flat Dollar NLC Cap or the entire NLC deduction. Severing only the Flat Dollar NLC Cap would result in the taxpayers receiving a complete refund because they could claim unlimited net losses. On the other hand, severing the entire NLC deduction would (putting aside the statute of limitations) increase the taxpayers' CNIT. The taxpayers argued that the court should apply the same remedy that it did in Nextel, which was to sever the Flat Dollar NLC Cap and grant a full refund. The Commonwealth argued that the General Assembly never intended an unlimited NLC, so severing the entire NLC deduction would be appropriate. The majority said it must determine legislative intent when deciding on severability. The majority first examined the various versions of the NLC since it was reinstated in 1994. "Although fiscal health is clearly one of the policy concerns to be considered, and an important one at that," the majority said, "it is not the dominant public policy underlying the NLC provision." Instead, the "main purpose of the NLC provision … is to promote business investment in the Commonwealth [and the Flat Dollar NLC Cap] serves as a public purse safeguard that is ancillary to the overarching purpose of business promotion." For this reason, the majority held that "the General Assembly's intent is better served by severing the offending portion (the flat-dollar $2 million cap) as opposed to striking the entire NLC [deduction]." While the Equal Protection Clause of the US Constitution and the Remedies Clause of the Pennsylvania Constitution do not require severance of the Flat Dollar NLC Cap, the majority said, the Due Process Clause of the US Constitution does. Further, the Due Process Clause, as interpreted by the U.S. Supreme Court in Chevron Oil Co.,4 entitles each taxpayer to retroactive relief in the form of a refund of the entire amount of unconstitutional CNIT paid. The majority analyzed whether the taxpayers were entitled to refunds under a retroactive application of Nextel by applying the three prong Chevron test: "(1) whether the decision establishes a new principle of law; (2) whether retroactive application of the decision will further the operation of the decision; and (3) the relevant equities." Distilling this test, the court concluded that whether a taxpayer was entitled to a refund hinged upon whether Nextel had adopted a new law. If Nextel had created new law, it could only apply prospectively, barring the taxpayers from claiming refunds for 2001 and 2006. If, however, Nextel did not create a "change in law, a litigant [was] entitled, as a matter of due process of that law, to have the long-standing law applied to it." Regarding the first prong of Chevron, the majority concluded that, "in Nextel, the Pennsylvania Supreme Court made it clear that, in finding that the [Flat Dollar NLC Cap] violated uniformity, it merely needed to apply existing case law to which it had 'steadfastly adhered' for 'over a century.'" The majority also concluded that severing the Flat Dollar NLC Cap equalized the non-uniform treatment, satisfying Chevon's second prong. Finally, the majority concluded that the Commonwealth had not met its burden of proving that severing the Flat Dollar NLC Cap would cause significant fiscal harm, noting that the "only amounts in the record are the $738,760 tax paid by GM and $0 tax paid by the 15,395 other taxpayers." While other similarly-situated taxpayers may bring "significant refund claims," the majority noted, the potential negative fiscal impact of those claims is offset by the applicable three-year statute of limitations and the fact Nextel could cause a "tremendous increase" in CNIT revenue by severing the Flat Dollar NLC Cap and leaving the Percentage NLC Cap intact. Judge Brobson concurred with the majority that the Flat Dollar NLC Cap violated the Uniformity Clause but dissented from the severability finding. While acknowledging that he would like to agree with the majority's severance analysis and its decision to award an unlimited NLC deduction, he noted that Nextel precluded the court from granting such relief. Analyzing the Pennsylvania Supreme Court's severability analysis in Nextel, Judge Brobson found that it "held that the intent of the General Assembly since reintroducing the NLC deduction has been to allow the deduction but with limits." Accordingly, Judge Brobson said, the Pennsylvania Supreme Court in Nextel found that the Commonwealth Court "contravene[d] the legislature's intent to limit this deduction" by granting Nextel a full refund. Nextel, GM and RB Alden all have held that the Flat Dollar NLC Cap unconstitutionally violates uniformity. These cases differ, however, because the Commonwealth Court's remedy in GM and RB Alden gives the taxpayers a full refund of taxes paid. Therefore, taxpayers challenging the Flat Dollar NLC Cap in years in which there was no Percentage NLC Cap are entitled to a full CNIT refund. The three-year statute of limitations, however, limits this class of taxpayers. Even for eligible companies, however, the finalization of this relief is subject to conditions. First, the court will likely hear these cases en banc, which could result in a loss for the taxpayers. Next, it is highly anticipated that the losing party will appeal to the Pennsylvania Supreme Court, which could also find against the taxpayers.
3 Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 171 A.3d 682 (Pa. 2017), cert. denied, 138 S. Ct. 2635 (2018). Document ID: 2019-2112 | |||||||||
