Argued: September 10, 2019
BEFORE: HONORABLE P. KEVIN BROBSON, Judge, HONORABLE MICHAEL
H. WOJCIK, Judge, HONORABLE BONNIE BRIGANCE LEADBETTER,
MICHAEL H. WOJCIK, JUDGE JUDGE
Motors Corporation (GM) petitions for review of the order of
the Board of Finance and Revenue (F&R) sustaining a
decision of the Commonwealth of Pennsylvania (Commonwealth)
Department of Revenue's (Department) Board of Appeals
that denied GM's petition for a refund of corporate net
income tax in the amount of $738, 760 for the tax year ended
December 31, 2001 (2001 Tax Year). At issue is the "net
loss carryover" (NLC) provision contained in Section
401(3)4. (c)(1)(A)(I) of 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. This statutory cap created a non-uniform
classification based solely on whether the taxpayer's
income exceeded $2, 000, 000; taxpayers whose income exceeded
$2, 000, 000 paid the tax, while taxpayers whose income did
not exceed $2, 000, 000 did not. The parties agree that the
cap violates the Uniformity Clause of Article 8, Section 1 of
the Pennsylvania Constitution. See Nextel Communications
of the Mid-Atlantic, Inc. v. Commonwealth, 171 A.3d 682
(Pa. 2017), cert. denied, 138 S.Ct. 2635 (2018)
(holding that a $3, 000, 000 flat-dollar cap of the NLC
provision violated the Uniformity Clause of the Pennsylvania
Constitution). However, they disagree regarding the
appropriate remedy. To wit: in order to cure the
constitutional infirmity, either the $2, 000, 000 flat-dollar
deduction or the entire NLC provision must be severed from
the Tax Code. Upon review, we conclude that only the
flat-dollar deduction must be severed from the Tax Code, and
we reverse F&R's order and remand to F&R for
recalculation and the issuance of a refund.
matter involves GM's petition for refund of Pennsylvania
corporate net income tax in the amount of $738, 760 for the
2001 Tax Year. According to the parties' Stipulation of
Facts, GM is a Delaware corporation, engaged in the
production and sale of motor vehicles throughout the United
States, including Pennsylvania. GM carried into the 2001 Tax
Year net losses, as defined under Section 401(3)4. (b) of the
Tax Code, 72 P.S. §7401(3)4. (b), apportioned to
Pennsylvania in the amount of $202, 276, 343, which had
accumulated since the tax year ended December 31, 1995. For
the 2001 Tax Year, GM's taxable income apportioned to
Pennsylvania before accounting for any net loss deduction was
$9, 394, 999. Although GM carried losses into the 2001 Tax
Year ($202, 000, 000) that vastly exceeded its 2001 income
($9, 300, 000), GM took a net loss deduction of only $2, 000,
000, which was the statutory cap on net loss deductions.
After accounting for the net loss deduction, GM reported
taxable income apportioned to Pennsylvania of $7, 394, 999,
which resulted in a corporate net income tax liability of
$738, 760, which GM paid in full. The Department accepted
GM's Tax Report as filed and did not issue an assessment.
Stipulation of Facts (S.F.), 12/14/18, Nos. 2-10.
February 2012, GM filed a petition for refund of Pennsylvania
corporate net income tax paid for the 2001 Tax Year with the
Board of Appeals claiming entitlement to a full refund based
on its contention that the flat-dollar net loss cap violated
the Uniformity Clause of the Pennsylvania Constitution. GM
argued that, had the deduction not been limited to $2, 000,
000, it could have deducted net losses equal to its taxable
income, thereby reducing its taxable income from $7, 394, 999
to $0, like the favored taxpayers. The Board of Appeals
denied the petition. GM timely appealed to F&R raising
the same issues.
recited the applicable provisions of the Tax Code: "A
net loss for a taxable year is the negative amount for said
taxable year determined under subclause 1 or, if applicable,
subclause 2. Negative amounts under subclause 1 shall be
allocated and apportioned in the same manner as positive
amounts." Section 401(3)4. (b) of the Tax Code, 72 P.S.
§7401(3)4. (b). Under subclause 1, "The net loss
deduction shall be the lesser of: (A)(I) For taxable years
beginning before January 1, 2007, two million dollars ($2,
000, 000)." 72 P.S. §7401(3)4. (c)(1).
denied GM's request for relief because the Tax Code set
the limit on net loss deductions for the 2001 Tax Year at $2,
000, 000. As to GM's challenge to the validity and/or
constitutionality of the statutory cap, F&R stated that,
as an administrative tribunal, it can only apply the current
state of Pennsylvania law and cannot pass upon the validity
or constitutionality of that law. See Parsowith v.
Department of Revenue, 723 A.2d 659, 662 (Pa. 1999)
(F&R is not a competent tribunal to pass upon a challenge
of a statute's validity or constitutionality);
Philadelphia Life Insurance Co. v. Commonwealth, 190
A.2d 111, 116 (Pa. 1963) (same). Thus, on November 6, 2012,
F&R affirmed the decision of the Board of Appeals and
denied GM's petition for review of refund. GM's
timely-filed petition for review to this Court
appeal, GM argues that, as a matter of statutory
construction, Nextel requires that the $2, 000, 000
cap be stricken from the statute, leaving no cap on the net
loss deduction for the 2001 Tax Year, not the entire NLC
provision. Further, considering that some taxpayers have
actually paid tax for 2001, while others have not, GM
contends the Due Process and Equal Protection Clauses of the
United States Constitution and the Remedies Clause of the
Pennsylvania Constitution require an actual (as opposed to
hypothetical) equalization of the relative tax positions of
the taxpayers for 2001. See U.S. Const. amend. XIV,
§1; Pa. Const. art. VIII, §1. We must also
determine whether the remedy in this case should apply
retroactively or prospectively.
Nextel & the Uniformity Clause
asserts that, in the 2001 Tax Year, GM and 133 corporations
had their loss deductions limited because their income
exceeded $2, 000, 000; if the deductions had not been
limited, those corporations could have applied their
carryover net losses to reduce their taxable income to zero.
S.F. No. 15. By contrast, over 15, 000 other corporate
taxpayers did not have their loss deductions limited because
their income fell below the $2, 000, 000 threshold; they were
able to deduct their total losses and reduce their taxable
income to zero; and they paid no tax. S.F. No. 14. GM
maintains that the Uniformity Clause prohibits classification
by income and has done so for over 100 years. While GM's
appeal was pending, the Supreme Court held in Nextel
that a flat-dollar limitation on the loss deduction for the
2007 tax year violated the Uniformity Clause because it
created two classes of "taxpayers solely on the basis of
their income." 171 A.3d at 699-700. The Court severed
the unconstitutional flat-dollar limitation from the statute.
Id. In accordance with Nextel, GM seeks the
same relief here.
Commonwealth responds that legislative intent is paramount in
this case of statutory severance. Whether the severance is
limited to the flat-dollar deduction or extended to the
entire NLC provision requires ascertaining the
legislature's intent in enacting the NLC provision.
According to the Commonwealth, the legislative history, as
analyzed by the Supreme Court in Nextel, confirms
that the General Assembly never intended an unlimited NLC
deduction, which would be the result if the flat-dollar
deduction is severed. Rather, the primary legislative intent
is to protect the Commonwealth's fiscal health, which is
served by severing the entire NLC provision. If the entire
NLC provision is severed, GM will not have overpaid its tax
and will not be entitled to a refund.
Uniformity Clause provides:
All taxes shall be uniform, upon the same class of
subjects, within the territorial limits of the authority
levying the tax, and shall be levied and collected under
Pa. Const. art. VIII, §1. The test of uniformity is
whether there is a reasonable distinction and difference
between the classes of taxpayers sufficient to justify
different tax treatment. Allegheny County v. Monzo,
500 A.2d 1096, 1106 (Pa. 1985).
Nextel, the Supreme Court examined whether the NLC
provision for the 2007 tax year, which restricted the amount
of loss a corporation could carry over from prior years as a
deduction against its 2007 taxable income to whichever is
greater: 12.5% of the corporation's 2007 taxable income
or $3, 000, 000, violated the Uniformity Clause. See
72 P.S. §7401(3)4. (c)(1)(A)(II).
Court opined that the Uniformity Clause prohibits classifying
taxpayers, including corporations, based on the amount of
their income. Nextel. "[Classifications based
solely upon the quantity or value of the property being taxed
are arbitrary and unreasonable, and, hence, forbidden."
Nextel, 171 A.3d at 696.
determining whether the NLC provision violated the Uniformity
Clause, the Court did not "look at its language in a
vacuum"; rather, it examined how the statute
"functions when applied to establish a corporation's
net income tax liability." Nextel, 171 A.3d at
698. The Court examined the long history of the NLC deduction
and the legislative intent behind the deduction.
General Assembly first introduced the deduction in 1980 to
spur business investment in Pennsylvania. Nextel,
171 A.3d at 703. However, a recession that "severely
impacted the state's budgetary health" led to the
suspension of the deduction from 1991 through 1994.
Id. at 704. In 1994, the General Assembly reinstated
the deduction, which included a flat-dollar cap for the first
time. The Court determined that "the overall structure
of the NLC reflects the legislature's intent to balance
the twin policy objectives of encouraging investment (by
allowing corporations to deduct some of the losses they
sustain when making such investments against their future
revenues), and ensuring that the Commonwealth's financial
health is maintained (through the capping of the amount of
this deduction)." Id. at 704.
Court then examined the NLC provision for the 2007 tax year:
Under its terms, the NLC allows any corporation with taxable
income of $3 million or less in 2007 to fully deduct all net
losses carried over from prior years up to the entire amount
of its taxable income. As a result, such corporations pay no
corporate net income taxes, given that the statutory tax rate
of 9.9% is ultimately applied only to a corporation's net
income. [Section 402 of the Tax Code, ] 72 P.S. §
7402(b). Thus, the NLC gives corporations with $3 million or
less in taxable income, and carryover losses equaling or
exceeding their taxable income, a de facto total exemption
from paying the corporate net income tax. By contrast,
corporations with taxable income over $3 million are not
permitted to exempt their entire income from taxes, even if,
like [the taxpayer], they have sufficient net losses from
prior years to offset it. Instead, such corporations are
limited in the amount of prior net losses they can claim to
the greater of 12.5% of their taxable income or $3 million,
thereby requiring them to pay the corporate net income tax of
9.9% on the remaining portion of their taxable income.
Nextel, 171 A.3d at 698-99. The Court determined
that "the NLC, by allowing corporations to take a flat
$3 million [NLC] deduction against their taxable income, has
effectively created two classes of taxpayers among
corporations which have [NLC] deductions equal to or
exceeding their taxable income." Id. at 699.
Such a classification creates an exemption from taxation
solely on the basis of income, which runs afoul of the
Uniformity Clause. Id. Thus, the Court concluded
that the NLC provision was unconstitutional as applied to the
taxpayer based on its inclusion of the $3, 000, 000 flat
deduction. Id. at 701.
Court then conducted a severability analysis.
Nextel, 171 A.3d at 701; see Section 1925
of the Statutory Construction Act of 1972 (Statutory
Construction Act), 1 Pa. C.S. §1925 (requiring courts,
in the event that "any provision of any statute or the
application thereof to any person or circumstance is held
invalid" to determine if the void provision may be
severed from the remaining valid portions of the statute).
Section 1925 creates a general presumption of severability
for every statute, subject to two exceptions:
(1) if the valid provisions are so essentially and
inseparably connected with, and so depend upon, the void
provision or application, that it cannot be presumed the
General Assembly would have enacted the remaining valid
provisions without the void one, or (2) if the remaining
valid provisions, standing alone, are incomplete and
incapable of being executed in accordance with the
Nextel, 171 A.3d at 703 (citation omitted).
determining whether either of these two exceptions are
applicable to a particular statute, legislative intent is our
Court's guiding consideration." Id.; see also
Saulsbury v. Bethlehem Steel Co., 196 A.2d 664, 666 (Pa.
1964) ("In determining the severability of a statute . .
. the legislative intent is of primary significance.").
"The 'touchstone' for determining legislative
intent in this regard is to answer the question of whether,
after severing the unconstitutional provisions of a statute,
'the legislature [would] have preferred what is left of
its statute to no statute at all.'" Nextel,
171 A.3d at 703 (quoting D.P. v. G.J.P., 146 A.3d
204, 216 (Pa. 2016)).
Supreme Court then considered the following three options:
(1) sever the flat $3 million deduction from the remainder of
the NLC; (2) sever both the $3 million and 12.5% deduction
caps and allow corporations to claim an unlimited net
loss-the remedy chosen by the Commonwealth Court majority; or
(3) strike down the entire NLC and, thus, disallow any [NLC].
Id. at 703. The Court determined that the first
option of severing the $3, 000, 000 flat deduction from the
remainder of the statute while preserving the percentage
was the most consistent with legislative intent because it
furthered the legislature's twin policy objectives.
Id. at 704. The Court explained:
By striking this provision, all corporations for the tax year
2007 would be limited to taking a [NLC] deduction of 12.5% of
their taxable income for that year. Thus, each corporation
will be entitled to avail itself of a [NLC] deduction, as the
legislature intended, but such deduction will be equally
available to all corporations during that year, no matter
what their taxable income. This fulfills the central tenet of
the Uniformity Clause that the tax burden be borne equally by
the class of taxpayers subject to paying it, inasmuch as it
assures that all corporations will equally share in the
obligation to pay corporate net income tax for tax year 2007.
Id. at 704-05. In the process, it explained that
striking all caps in the NLC provision (option (2))
contravened the legislature's intent to limit this
deduction to protect the Commonwealth's fiscal health by
allowing unlimited net loss deductions. Id. at 705.
Alternatively, the Court reasoned that striking the entire
NLC provision (option (3)) would leave the taxpayer owing
more corporate taxes than it paid and contravened the
legislature's "intent to promote investment by
allowing every corporation doing business in Pennsylvania an
opportunity to benefit from this deduction."
Id. at 705.
case, we are dealing with the 2001 Tax Year, in which the
NLC's dollar cap stood at $2, 000, 000. This limitation
is the operational equivalent of the cap the Supreme Court
severed in Nextel. The parties agree the $2, 000,
000 flat deduction runs afoul of the Uniformity Clause based
on Nextel. Consequently, we must engage in a
unlike the NLC provision at issue in Nextel, the NLC
provision here does not contain a percentage cap option. As a
result, there are only two severability options available:
(1) sever the flat $2, 000, 000 deduction from the remainder
of the NLC and allow corporations to claim an unlimited net
(2) strike down the entire NLC and, thus, disallow any [NLC].
Supreme Court determined neither one of these options
satisfied both of the General Assembly's policy
goals of promoting business investment while maintaining the
Commonwealth's fiscal health. Nextel, 171 A.3d
at 704-05. Unfortunately, the Supreme Court did not determine
which of these divergent goals would better serve the General
Assembly's intent. See id.
Nextel was pending before the Supreme Court, this
Court faced a similar predicament in RB Alden Corp. v.
Commonwealth, 142 A.3d 169 (Pa. Cmwlth. 2016) (Alden
I). In Alden I, as here, the NLC
provision for the 2006 tax year contained a $2, 000, 000 flat
cap, but no percentage cap. Alden I, 142 A.3d at
185. Upon determining that the $2, 000, 000 cap was
unconstitutional, we eliminated the cap from the NLC
provision and remanded the matter to F&R to calculate the
taxpayer's corporate net income tax without a cap.
Id. at 186. This enabled the taxpayer to claim an
unlimited NLC deduction for the 2006 tax year.See id.
Having decided the matter without the benefit of the Supreme
Court's analysis in Nextel, this Court did not
examine legislative intent when fashioning a remedy to cure
the constitutional infirmity. See id. On appeal, the
Supreme Court, by per curiam order, vacated this Court's
final order and remanded the matter "for reconsideration
in light of Nextel. RB Alden Corp. v. Commonwealth,
194 A.3d 125 (Pa. 2018) (Alden III)
directs that legislative intent is paramount in a case of
statutory severance. 171 A.3d at 703. Given the divergent
goals presented here, and the absence of a third option that
would satisfy both goals that was present in Nextel,
we must determine the General Assembly's paramount
intention. Commonwealth v. Neman, 84 A.3d 603, 614
(Pa. 2013). We start by examining the "'main'
purpose" for the legislation. Neman, 84 A.3d at
General Assembly enacted the NLC provision to promote
business development in Pennsylvania. Nextel, 171
A.3d at 705. In the words of its proponents, the purpose of
the NLC provision was to: "assist new 'high
technology' businesses that were focused on the rapid
development of new products, as well as to assist existing
construction and farming enterprises which had been harmed by
a recent recession." Id. at 703-04 (quoting
House Legislative Journal, at 2579, Remarks by Representative
Pott (November 18, 1980)).
Supreme Court in Nextel recognized, the NLC
provision has been around in one form or another since 1981.
Id. at 704. For the first ten years, the NLC
deduction was unlimited. Id. During a recession, the
General Assembly suspended the NLC provision for four years
and, since 1994, has steadfastly maintained a cap in various
forms ever since to maintain the state's fiscal health.
legislative enactments to suspend or limit the NLC deduction
clearly demonstrate the General Assembly's "intent
to limit this deduction" to promote the
Commonwealth's fiscal health. Nextel, 171 A.3d
at 705. But, is fiscal health the primary objective
of the NLC provision?
in Safe Auto Insurance Company v.
Oriental-Guillermo,214 A.3d 1257, 1268 (Pa. 2019), our
Supreme Court examined "divergent policy concerns"
in the context of determining the enforceability of an
unlisted resident driver exclusion (URDE) in a personal
automobile insurance policy. At issue was whether the URDE
contravened the Motor Vehicle Financial Responsibility Law
(MVFRL) and its underlying "competing public
policy concerns of remedial coverage and cost
containment." Id. at 1268. Although cost
containment is clearly one of the policy concerns to be
considered, the Court determined it was not "the
dominant public policy underlying the ...