Court holds NOL cap violates "Uniformity Clause" | KPMG | GLOBAL

Pennsylvania: Court holds NOL cap violates “Uniformity Clause”

Court holds NOL cap violates "Uniformity Clause"

The Pennsylvania Commonwealth Court held that the net operating loss (NOL) deduction limit, as in effect in 2007, violated the “Uniformity Clause” of the Pennsylvania Constitution as applied to the taxpayer. The court concluded that the appropriate remedy was to allow the taxpayer to apply an uncapped NOL deduction and to refund the tax paid as a result of the unconstitutional cap.


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The case is Nextel Communications Inc. v. Pennsylvania, No. 98 F.R. 2012 (Pa. Commw. Ct. November 23, 2015). Read the court’s decision [PDF 411 KB]


For corporate net income (CNI) tax purposes, Pennsylvania has limited the amount of net NOL deductions for many years. Under Pennsylvania law in effect for the tax year at issue (2007), the NOL deduction was limited to the greater of 12½% of taxable income or $3 million. 

The taxpayer, a telecommunications company doing business in Pennsylvania and other states, carried forward $150 million of NOLs to the 2007 tax year in which it had $45 million in Pennsylvania income. Applying the 12½% limitation rule resulted in a deduction that would be greater than $3 million (for the taxpayer, $5.6 million). Accordingly, claimed the $.6 million as a deduction and paid approximately $4 million in CNI tax on its remaining income. 

The taxpayer subsequently requested a refund of tax paid for 2007 on the basis that the NOL cap, asserted that the cap violated the Uniformity Clause of the Pennsylvania Constitution.  After the Board of Appeals and the Board of Finance and Revenue determined that they lacked authority to rule on the taxpayer’s constitutional challenge and thus denying the taxpayer’s claim for refund, the case went before the Commonwealth Court. 

The Commonwealth Court held that the NOL cap violated the Uniformity Clause, and allowed the taxpayer to apply an uncapped NOL carryover.

KPMG observation

Tax professionals believe it is likely that the case will be appealed and that the legislature may also attempt to design a remedy. In the interim, taxpayers need to consider filing refund claims for any years in which their NOL deduction was capped. The process for requesting a refund in Pennsylvania involves the filing of a petition with the Board of Appeals (rather than an amended return).


Read a November 2015 report [PDF 94 KB] prepared by KPMG LLP: Commonwealth Court holds that Pennsylvania’s NOL Cap Violates Uniformity Clause—Allows Taxpayer to Apply an Uncapped NOL Carryover

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