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SALT TALK: What’s All This Noise I Hear about Uniforms Being Unconstitutional in Pennsylvania?

Posted by Wayne Berkowitz CPA, J.D., LL.M. on Sep 6, 2016 12:50:00 PM
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While reading the most recent Commonwealth Court of Pennsylvania decision[1] striking down the Corporate Net Income Tax cap on net operating loss deductions (NOLs), I repeatedly had to assure myself that I wasn’t misreading or mishearing the basis of the Court’s decision. The Court found the cap to be in contradiction to the Uniformity Clause of the State Constitution. I couldn’t stay focused and kept hearing the voice of a kindly old lady in my head. She seemed baffled over my attaching importance to this matter and uttered some convoluted question as to why I was making all this noise over uniforms being found unconstitutional in Pennsylvania. 

Not understanding my momentary lapse of reason, I realized that although the case was riveting, with the recent passing of Gene Wilder, I couldn’t help thinking about my favorite Saturday Night Live character from way back in the seventies, Ms. Emily Litella. Ms. Litella was played by none other than Gilda Radner, who was married to Mr. Wilder. Ms. Litella was a kind, elderly woman with a hearing problem, who would offer editorial opinions on news topics of interest that she often misheard. (What’s all this fuss about natural race horses, other kinds of horses are important too… Why is everyone so upset about crustaceans hijacking planes … Why do we need an eagles’ rights amendment.) She would ramble on until corrected by one of her newscasters and would utter her trademark saying “Oh never mind… that’s completely different.”

The Court uttered its own “never mind” in renouncing at length the taxpayer’s arguments that despite the NOL limitation, the gain which they sought to offset was nevertheless nonbusiness income and should not be sourced to Pennsylvania. The tax benefit doctrine did not apply, as well as its multiformity argument of the sale of the partnership interest having no connection to the State, and yet the Court ruled in favor of the taxpayer by finding the NOL limitation unconstitutional.

The fact that victory was the result of the State Constitution’s Uniformity Clause[2], although consistent with another Commonwealth Court decision from 2015,[3] is surprising nonetheless.  While the U.S. Constitution and numerous states have a Uniformity Clause very similar to Pennsylvania’s, apparently Pennsylvania’s possesses some special magical quality that even prevents the legislation of graduated tax rates based on varying income levels. So wondrous is the Clause the Pennsylvania Bar Association even has a “Taxation and Uniformity Clause Committee.”

The 2015 Nextel Communications case is now on appeal to the Pennsylvania Supreme Court. I would imagine if they haven’t already done so, the Commonwealth will be filing an appeal in this case as well. Taxpayers who have been limited by the NOL caps, with years still open for refund claims (generally three years from the filing date of the return) should consider filing as soon as possible. 

If this ruling raises concerns for your particular situation, contact your Berdon advisor or Wayne Berkowitz at WBerkowitz@Berdonllp.com.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, New York Accountants, advises on the unique requirements of governments and municipalities across the nation.

[1] RB Alden Corp. v. Commonwealth, No. 73 F.R. 2011 (Pa. Commw. June 15, 2016)

[2] The Uniformity Clause states: "All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax. . . ." Pa. Const.art. VIII, §1.

[3] Nextel Communications of Mid-Atlantic, Inc. v. Commonwealth of Pennsylvania, 129 A.3d 1 (Pa. Commw. 2015)

Topics: SALT TALK

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