Reed Smith Client Alerts

In a 5–2 decision, the Pennsylvania Commonwealth Court in an en banc panel has held that Pennsylvania’s NOL cap violates the Uniformity Clause of the Pennsylvania Constitution, and granted the taxpayer (Nextel Communications of the Mid-Atlantic, Inc., or “Nextel”) the right to deduct its NOLs without regard to the statutory NOL cap, which resulted in a refund to Nextel.1 Reed Smith represented Nextel in this case, and we previously reported on the NOL cap issue in our October 5, 2015 Alert.

For background, during the period at issue in this case (2007), the statutory NOL cap on Pennsylvania’s corporate net income tax was the greater of $3 million or 12.5% of taxable income. Under the cap, Nextel was allowed to deduct only $5.6 million of NOLs in computing its 2007 taxable income (12.5% of its $45 million of taxable income prior to the NOL deduction), despite having NOLs well in excess of $45 million. At the same time, the court noted that other similarly situated taxpayers with income below $3 million were able to reduce their taxable income to zero. The court found that this disparate treatment resulted in an unconstitutional progressive rate structure.

As for remedy, the court held that the only practical approach was to strike the NOL cap in its entirety. Thus, the court granted Nextel the right to deduct its NOLs without regard to the statutory NOL cap, resulting in a refund of $3.9 million.

Although we expect the Commonwealth to appeal this decision, taxpayers that were affected by the statutory NOL cap should file refund claims for any open periods if they have not already done so. For most taxpayers, the tax year ending December 31, 2012, and all subsequent tax years, should still be open. Here is a quick and easy way to file a refund claim on this issue.

If you have questions regarding the application of the Nextel decision to your company’s facts or if you would like assistance, please contact one of the authors of this Alert or another member of the Reed Smith State Tax Group. For more information on Reed Smith’s Pennsylvania tax practice, visit

  1. Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth of Pennsylvania, Commw. Ct. Docket No. 98 F.R. 2012. A copy of the decision can be accessed here. The court was unanimous in holding that the NOL cap was unconstitutional; two of the seven judges filed a concurring and dissenting opinion in which they disagreed with the remedy put forward by the majority.


Client Alert 2015-326