Supreme Court Won’t Hear Nextel’s Challenge to PA’s Cap on Net Operating Loss Carryforwards

June 18, 2018

Following the US Supreme Court’s denial of cert in Nextel, taxpayers with protective refund claims held pending the ultimate outcome of Nextel will need to re-evaluate their claims as Pennsylvania begins to address them individually.

The US Supreme Court on June 11 declined to accept Nextel Communications of the Mid-Atlantic v. Commonwealth.[1] Nextel’s appeal to the Court protested a pyrrhic victory handed down by the Pennsylvania Supreme Court. In that case, the Pennsylvania Supreme Court addressed the “net loss carryover” provision of the Pennsylvania Revenue Code as in effect for tax year 2007. Under that provision, the amount of Net Operating Loss (NOL) carryforward (from prior year losses) a corporation could deduct from its pre-apportioned 2007 taxable income was limited to the greater of (1) 12.5% of the corporation's 2007 taxable income (percentage cap); or (2) $3 million (fixed dollar cap).

The Pennsylvania Supreme Court held that the fixed dollar cap on NOL carryforwards violated the Uniformity Clause of the Pennsylvania constitution, but that the percentage cap did not. Then, the court held that appropriate remedy is not to delete both “caps,” but rather to strike only the fixed dollar cap—leaving the percentage cap intact. Because Nextel was limited by the percentage cap, the Pennsylvania Supreme Court’s decision left Nextel with no relief.

Many other Pennsylvania taxpayers filed refund claims that were held pending the ultimate outcome of Nextel. Those cases will now begin to move through the appeals process. This means taxpayers must decide whether to pursue or abandon their claims. The unanswered questions left in the wake of Nextel could leave many taxpayers wondering “what do I do?” For example:

  • Does the Pennsylvania Supreme Court’s decision apply only to Nextel because it was based upon an “as-applied” constitutional challenge rather than a “facial” challenge?[2]
  • Now that the Pennsylvania and US Supreme Courts have rendered decisions, can we determine with legal certainty whether taxpayers with open claims are left with any remedy at all—and if so, is that remedy prospective or retroactive?
  • Is the department’s position that it plans to only apply Nextel prospectively constitutional? [3] Does pursuing the already-filed claims increase risk that the department will reverse this position? How will this impact the Pennsylvania tax community as a whole?[4]

Another case, RB Alden v. Commonwealth,[5] is still pending before the Pennsylvania Supreme Court, and may help to clear up some of these questions. Like Nextel, RB Alden challenges the constitutionality of Pennsylvania’s statutory cap on NOL carryforwards. RB Alden differs from Nextel in that it deals with a pre-2007 tax year where only a dollar cap was in force. Under the Pennsylvania Supreme Court’s rationale in Nextel, one would expect the Pennsylvania Supreme Court to grant RB Alden’s refund claim, effectively eliminating all dollar caps on NOL usage for the pre-2007 periods involved. Doing so, however, would require the Pennsylvania Supreme Court to affirmatively determine that relief is retroactive.

While the US Supreme Court’s decision ends a long-running case in Nextel, taxpayers still have work to do and questions to answer. Of course, each taxpayer should weigh the risks and benefits of withdrawing versus continuing to pursue these appeals, as the consequences will depend on each taxpayer’s facts and circumstances.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

New York
Cosimo A. Zavaglia

Justin D. Cupples
Ester Lee

[1] No. 6 EAP 2016 (Pa. S. Ct. Oct. 18, 2018).

[2] Generally, in US constitutional law, a facial challenge is a challenge to a statute in which the taxpayer alleges that the law is always unconstitutional, and therefore void. An as-applied challenge alleges that a particular application of a statute is unconstitutional.

[3] See Commonwealth v. Molycorp, Inc., 392 A2d 321 (1978).

[4] Late last year, the Pennsylvania Department of Revenue issued guidance stating its policy decision to apply the Pennsylvania Supreme Court’s decision in Nextel only prospectively. Pennsylvania Department of Revenue Corporation Tax Bulletin 2017-01, November 16, 2017.

[5] RB Alden Corp. v. Commonwealth, 66 MAP 2017.