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February 2, 2023 Last Edit: June 5, 2025

PA Court Ruling Could Prompt Millions in Corporate Tax Refunds

News You Can Use

BiznewsPA recently ran a very informative news item regarding a Commonwealth Court tax ruling. You can read the post at the following link and below: Court ruling could prompt millions in corporate tax refunds – biznewsPA – News That Matters Thanks to a recent court ruling, the commonwealth of Pennsylvania could be on the hook for more than $100 million in tax refunds to businesses.

The ruling came in a case that arose over provisions outlining how companies can use past losses to lower their tax bills.
Some corporate taxpayers have claimed, successfully, that provisions that have since been dropped violated the state constitution.
Now, state courts are dealing with how to handle tax payments that were made when those unconstitutional provisions were in effect.
In the most recent case, decided on Dec. 28, the Commonwealth Court of Pennsylvania said the state must refund about $2 million in corporate net income taxes paid by Alcatel-Lucent, a telecom company based in France.

Why: The answer starts with understanding how companies use old losses to offset their taxes.

Under current law, companies can deduct past losses – if they have any – to reduce up to 40% of their taxable net income, according to Michael Bannasch, state and local tax practice leader at Lancaster-based accounting and consulting firm RKL LLP.
Thus, a company with profits of $10 million can deduct up to $4 million in past losses — even if it is carrying more losses than that on its books.
Under previous versions of the tax code, companies could deduct either a percentage of their income — as in current law — or a flat-dollar amount, whichever was greater.
Courts, however, ruled that the flat-dollar amount violated the state constitution.
It allowed some smaller companies to completely avoid taxation, while larger companies could not.

How: In 2014, the year at issue in the Alcatel case, the state allowed a flat dollar deduction was $4 million, according to the court ruling.

A company that had taxable net income below $4 million could effectively wipe out its tax liability.
But that was not the situation for Alcatel. The company had taxable net income in 2014 of roughly $27.3 million in Pennsylvania, according to the court ruling.
Alcatel had to use the percentage formula, enabling it to deduct net losses totaling 25% of its taxable net income, or about $6.8 million, according to the ruling.
That left the company with income of $20.5 million and a tax bill of just over $2 million.
At the time, however, Alcatel had enough past losses to completely offset its taxable income, according to the ruling. It was just limited in how much it could use.
The question for the courts has been how to make it up to Alcatel and other larger companies.

What’s the answer: It has not been ‘go back and collect taxes from companies that didn’t owe any under the flat-dollar provisions deemed unconstitutional.’

Instead, Pennsylvania courts have ruled in two cases — in Alcatel and another involving General Motors — that the taxpaying companies should get refunds.
“The taxpayer thinks the court got it right and is anxious for these matters to come to a final resolution,” said Kyle Sollie, a Philadelphia-based partner in the state tax group at law firm Reed Smith.
Sollie, who represented both Alcatel and GM, declined to comment further.

How is it $100 million: In short, other taxpayers have similar claims pending and thus could also be eligible for refunds.

Attorneys for the state cited the $100 million-plus figure in a brief they filed in the Alcatel case, noting that an adverse ruling would have “devastating fiscal repercussions.”
In a 2016 bond disclosure, the state estimated that the potential liability from tax appeals related to net losses ranged from $4 million to $500 million or more.
A spokesperson for the Pennsylvania Department of Revenue said the agency is reviewing the Dec. 28 decision.

Can it get more complicated: Of course.

In 2017, before its 2021 decision ordering a refund for GM, the Pennsylvania Supreme Court decided against a roughly $4 million refund in a case involving tech company Nextel.
The Alcatel case followed the logic of the GM decision, said Richard Botwright, co-chair of the state and local tax group at Reading law firm Stevens & Lee.
However, the 2014 tax provisions at issue in the Alcatel case are closer to the 2007 provisions at issue in the Nextel case, he said.
GM was complaining about a 2001 version of the law that contained only a flat-dollar deduction for past losses — and capped the deduction at a certain amount. The company’s tax bill for the year was about $739,000.
Alcatel and Nextel challenged laws that contained both the flat-dollar deduction and the percentage deduction.
“These decisions are hard to reconcile,” Botwright said.

What’s next: The state has until late January to appeal the Alcatel decision to the state’s highest court, an outcome that outside attorneys deemed likely.

“It’s definitely going to be appealed because the dollars are just astronomical,” said Paul R. Morcom, a member and chair of the state and local tax group at Harrisburg law firm McNees Wallace & Nurick.

Do I get a refund: Unless you have filed an appeal, it is too late.

The legislature eliminated the flat-dollar cap in 2017 and there is a three-year statute of limitations on demanding a refund, attorneys said.
The refund also applies only to companies that pay the corporate net income tax, not to pass-through entities whose profits are taxed as personal income of their owners.

Topics:

Taxes

State:

Pennsylvania

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