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General Motors Corp. v. Commonwealth

Commonwealth Court of Pennsylvania

November 21, 2019

General Motors Corporation, Petitioner
v.
Commonwealth of Pennsylvania, Respondent

          Argued: September 10, 2019

          BEFORE: HONORABLE P. KEVIN BROBSON, Judge, HONORABLE MICHAEL H. WOJCIK, Judge, HONORABLE BONNIE BRIGANCE LEADBETTER, Senior Judge

          OPINION

          MICHAEL H. WOJCIK, JUDGE JUDGE

         General 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), [1] 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.

         I. Background

         This 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.

         In 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.

         F&R 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).

         F&R 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, [2] 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 followed.[3], [4]

         II. Issues

         In this 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.

         III. Discussion

         A. Nextel & the Uniformity Clause

         1. Contentions

         GM 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.

         The 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.

         2. Analysis

         The 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 general laws.

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).

         In 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).

         The 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.

         In 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.

         The 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.

         The 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.

         The 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 legislative intent.

Nextel, 171 A.3d at 703 (citation omitted).

         "In 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)).

         The 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 cap[5] 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.

         In this 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 severability analysis.

         However, 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 loss; or
(2) strike down the entire NLC and, thus, disallow any [NLC].

         The 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.

         While 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).[6] 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.[7]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)[8]

         Nextel 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 614.

         The 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)).

         As the 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. Id.

         The 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?

         Recently, 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)[9] 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 ...


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