PA Court Rules on Net Operating Loss Restriction

- The Pennsylvania Supreme Court has held that a provision of state tax law that restricted the amount a net operating loss that a corporation could carryover to succeeding tax years was a violation of the state’s constitution.  However, the court found that the provision in question was severable, and so the plaintiff taxpayer here got no relief.

The tax law complained of limited an NOL carryover to 12.5 percent of the corporation’s income in the year to which the loss was carried over, or $3 million, whichever was greater.  The taxpayer had income in the relevant year of some $45 million, but a carried over NOL of more than $150 million.  It argued that it should be allowed to offset all of its income, and that the restriction fell afoul of the uniformity clause.  A lower court had agreed, but the state supreme court found that only the flat $3 million violated the constitution, because it was arbitrary; the alternative 12.5 percent factor did not, and should be retained, in order to fulfill the legislature’s presumed intent to limit carryovers.  And since the taxpayer had used 12.5 percent as the factor limiting its offset to begin with, it got no relief.  Nextel Communications of the Mid-Atlantic v. Commonwealth, docket no. 6 EAP 2016, decided October 18, 2017. 

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