State Income Tax: Appropriate remedy for unconstitutional cap on net loss carryover (NLC) deduction – severing the cap or severing the entire NLC deduction?
General Motors Corporation v. Com., 222 A.3d 454 (Pa. Cmwlth. 2019) 12 MAP 2020 (direct appeal)
This is a direct appeal by the Commonwealth from the Commonwealth Court’s reversal of the Board of Finance and Revenue’s decision denying General Motors Corporation’s (GM) petition for a refund of corporate net income tax in the amount of $738,760 for the 2001 Tax Year. GM argued before the Commonwealth Court that the “net loss carryover” (NLC) provision contained in the Tax Reform Code of 1971 (Tax Code) for the 2001 Tax Year, which imposed a $2,000,000 cap on the amount of loss a corporation could carry over from prior years as a deduction against its 2001 taxable income, violates the Uniformity Clause of Article 8, Section 1 of the Pennsylvania Constitution, based on Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 642 Pa. 729, 171 A.3d 682 (2017), cert. denied, ––– U.S. ––––, 138 S. Ct. 2635, 201 L.Ed.2d 1030 (2018) (Nextel) (holding that a $3,000,000 flat-dollar cap of the NLC provision violated the Uniformity Clause of the Pennsylvania Constitution). GM argued that the NLC cap must be severed, leaving a NLC provision with no cap. The Commonwealth agreed that the NLC is unconstitutional, but argued that the entire NLC provision must be severed from the Tax Code, leaving no provision for a NLC deduction. Judge Wojcik, writing for the Commonwealth Court majority, agreed with GM and concluded that only the NLC cap must be severed, leaving a NLC deduction with no cap, and remanded to the Board for recalculation and the issuance of a refund to GM.
Judge (now President Judge) Brobson concurred with the majority’s conclusion that the cap violated the Uniformity Clause, but dissented as to the remedy, arguing that Nextel requires that rather than merely severing the cap, the remedy must be to sever the entire NLC provision, leaving no NLC deduction at all. As Judge Brobson explained:
The majority deftly attempts to escape the grip of the Pennsylvania Supreme Court’s decision in Nextel … by contending that striking the cap for the 2001 Tax Year at least furthers the General Assembly’s “dominant” intent to promote business investment in the Commonwealth. … Essentially, the majority holds that for Tax Year 2001, given a choice between an unlimited NLC deduction or no deduction at all, the General Assembly would choose an unlimited deduction. The legislative history recounted by the Pennsylvania Supreme Court in Nextel…, and the Supreme Court’s holdings in Nextel… on the question of legislative intent, however, do not support the majority’s hypothesis. … Pennsylvania used to have an unlimited NLC deduction, but the General Assembly scrapped it out of concern for the fiscal health of the Commonwealth. When the General Assembly brought the deduction back in 1994, it put a cap on the deduction. Every iteration of the deduction since has had some form of cap on it. For this reason, in Nextel…, the Supreme Court expressly held that an unlimited cap is “clearly contrary to the wishes of the General Assembly.”
… Under [Nextel], we cannot sever the $2 million cap from the NLC deduction provision and allow GM to take an unlimited NLC deduction for the 2001 Tax Year. To the extent we may take any action with respect to modifying the language of the deduction under Section 1925 of the Statutory Construction Act, our only option, in keeping with the General Assembly’s intent to allow only limited NLC deductions, is to strike the deduction in its entirety for the 2001 Tax Year. As for remedying the harm to GM, again the Supreme Court’s decision in Nextel … constrains the Court. We cannot compel the Commonwealth to refund anything to GM, because, as in Nextel…, striking the entirety of the NLC deduction provision for the 2001 Tax Year means that GM did not overpay its corporate net income tax for the 2001 Tax Year.
PKB Concurrence and Dissent at 7-8.