Insights Blog

21 Jan, 2016

Pennyslvania NOL Cap Found Unconstitutional

Posted by Dan Larson on Jan 21, 2016 1:50:44 PM

State NOL, Franchise Tax

Pennsylvania taxpayers to carry over unused prior year NOLIn Nextel Communications of the Mid-Atlantic, Inc. v. Pennsylvania, the Commonwealth Court of Pennsylvania recently held that the statutory cap on the net operating loss (“NOL”) carryover deduction violated the Uniformity Clause of the Pennsylvania Constitution because it provided for disparate treatment of taxpayers depending upon their level of taxable income.[1] 

Pennsylvania allows taxpayers to carry over unused prior year NOLs to reduce or offset the amount of taxable income subject to Pennsylvania Corporate Net Income (“CNI”) tax.[2]  At issue in Nextel was the cap on the NOL carryover deduction for the 2007 tax year.  For that year, Pennsylvania limited the amount of the NOL carryover deduction to the greater of 12.5% of a taxpayer’s taxable income or $3 million.[3] 

Due to the limitation on its use of NOLs, Nextel was required to pay approximately $4 million in CNI tax, despite having enough NOLs to reduce their taxable income to $0 for the 2007 tax year. Nextel applied for a refund, alleging that the NOL limitation violated the Uniformity Clause of the Pennsylvania Constitution. 

The court found for the taxpayer, holding that the Pennsylvania NOL deduction limitation created “classes of taxpayers according to their taxable income,” and therefore violated the Uniformity Clause.  The court found that the statute, on an as-applied basis, treated Nextel Communications differently than taxpayers with taxable income of $3 million or less by preventing Nextel Communications from utilizing its NOLs.  The court provided relief by allowing Nextel to reduce its 2007 taxable income to $0 and ordered that the $4 million paid by Nextel in CNI tax be refunded.  Recognizing that its decision and the chosen remedy could have “far-reaching” consequences, the court specifically confined its remedy to “the Commonwealth, Nextel, and the 2007 Tax Year.” The court also called upon the Pennsylvania General Assembly to address the NOL limitations, noting that its decision could call into question the overall validity of the NOL deduction.


GMG Insight – It is expected that the Commonwealth will appeal the Nextel decision to the Pennsylvania Supreme Court in the upcoming weeks. Therefore, while the case is not yet final, taxpayers who had NOL carryovers in excess of the cap should consider filing protective CNI tax refund claims for all open periods.  For taxpayers who have already filed a tax return and paid tax to the Commonwealth, a petition for refund of tax paid may be made within three years of actual payment of tax.

Additionally, taxpayers should be aware that the statutory cap on NOL carryover deductions increased after 2007.  For the 2010 – 2013 tax years, the limit is the greater of $3 million or 20% of taxable income; $4 million or 25% for tax year 2014; and $5 million or 30% for tax year 2015 and after.  

Finally, it is possible that taxpayers outside the general three-year refund limitation period could utilize the Nextel decision to reduce their Pennsylvania CNI tax liability when filing a corrected report to reflect the results of a final federal determination or an amended Federal return. Pa. Code 153.65(d) provides:

“If as a result of the filing of a corrected report, there is a change in the amount of the taxable income of a corporation, the Department has the power and duty to resettle the tax.  Changes to the tax due made as a result of the filing of the corrected report are limited to those which result directly from the filing of the amended Federal return.”

In the event a taxpayer’s Pennsylvania CNI tax liability increases as the result of an amended Federal return, the Nextel decision may require that any resettlement of tax by the Department take into account the unconstitutional cap on NOL carryover deductions. 


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[1] Nextel Communications of the Mid-Atlantic, Inc. v. Pennsylvania, Pennsylvania Commonwealth Court, No. 98 F.R. 2012, Nov. 23, 2015.

[2] 72 Pa. Stat. Ann. §7401(3)4.

[3] 72 Pa. Stat. Ann. §7401(3)4.(c)(1)(A)(II).