Pennsylvania Department of Revenue Issues Corporation Tax Bulletin 2018-02 – Will Not Apply Nextel Retroactively


In Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, No. 6 EAP 2016 (Pa. Oct. 18, 2017), the Pennsylvania Supreme Court, like the Commonwealth Court before it, held that Pennsylvania’s 2007 net operating loss (NOL) deduction limitation, which limited the use of NOLs to the greater of $3 million or 12.5-percent of taxable income, as applied to the taxpayer violated the state’s uniformity clause.  While both courts specifically took issue with the $3 million limitation (or flat dollar limitation), the Pennsylvania Supreme Court, unlike the Commonwealth Court, only struck the flat dollar limitation for purposes of a remedy and let stand the percentage of taxable income limitation.  The taxpayer petitioned the Pennsylvania Supreme Court for reargument as to the remedy, but, on January 4, 2018, that petition was denied.  For our previous coverage of the Nextel controversy and aftermath, see BDO’s January 2018 Alert and December 2017 Alert.  While there was concern for some taxpayers that the Nextel decision would be applied retroactively, the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2018-02 on May 10, 2018, announcing that it will apply Nextel prospectively only. 



In Corporation Tax Bulletin 2017-01 issued November 17, 2017, the Department advised that the flat dollar limitation was not available for tax years beginning in 2017 and thereafter.  However, the Department left open the application of Nextel to tax years beginning prior to January 1, 2017, pending the decision on the petition for reargument by the Pennsylvania Supreme Court. 
Corporation Tax Bulletin 2018-02
The Department has now issued long-sought guidance to corporate taxpayers that it will not apply the Nextel decision retroactively to years beginning prior to January 1, 2017.  As a result, both the flat dollar limitation and the percentage limitation will apply for those years.  For tax years beginning after December 31, 2016, and before December 31, 2017, the Department will not allow application of the flat dollar limitation and limit a Pennsylvania NOL deduction by the 30-percent of taxable income limitation applicable for that period only.  For tax years beginning after December 31, 2017, statutory amendments removed the flat dollar limitation and, thus, corrected the constitutional infirmity.
The Department’s decision to prospectively apply Nextel may relieve smaller taxpayers.  For example, a taxpayer with taxable income lesser or equal to the flat dollar limitation would suffer detriment if the NOL limitation was only a percentage of taxable income as mandated by Nextel.  A larger taxpayer generally with taxable income that is greater in amount than the flat dollar cap divided by the percentage limit would not suffer detriment as a result of retroactive application of Nextel.


BDO Insights

  • Corporation Tax Bulletin 2018-02 is welcome guidance and clarification from the Pennsylvania Department of Revenue for all corporate income taxpayers. 
  • Taxpayers affected by Nextel and the new development of Corporation Tax Bulletin 2018-02 issued May 10, 2018, should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.