Net Operating Loss Cap is Unconstitutional 

Tax Alert

June 23, 2016

In RB Alden Corp. v. Commonwealth, No. 73 F.R. 2011 (Pa. Commw. June 15, 2016), the court addressed the taxpayer’s liability for 2006 Corporate Net Income (CNI) Tax on gain from the sale of part of its interest in a partnership that owned an apartment complex in Philadelphia. The court first held that the gain was taxable for CNI Tax purposes for the reasons discussed below, but then held that the $2 million cap on a net loss carryover deduction for 2006 Corporate Net Income Tax purposes is unconstitutional because it results in two classes of taxpayers: one for taxpayers that can completely eliminate their taxable income; and another that can only limit the deduction to the extent of the cap. As a result, the court held that RB Alden was entitled to use its net operating loss carryovers without limitation, thus eliminating all of the company’s Pennsylvania taxable income. The holding relies on, and is consistent with, Nextel Communications of Mid-Atlantic, Inc. v. Commonwealth, 129 A.3d 1 (Pa. Commw. 2015), although the facts in RB Alden differ somewhat from those in Nextel. The opinion reinforces the concurring and dissenting opinions in Nextel, which is now on appeal before the Pennsylvania Supreme Court.

The court also addressed two arguments raised by the taxpayer in regard to the taxability of the gain on the sale of its partnership interest. First, the court did not accept the taxpayer’s nonbusiness income argument, on the grounds that its sale of part of the partnership interest was in line with the taxpayer’s regular trade or business operations, namely management of the apartment complex. Neither did the court accept the multiformity argument that the sale of the partnership interest bore no relation to the activities in Pennsylvania. However, the court rejected the Department of Revenue argument that the doctrine of multiformity no longer applies in Pennsylvania. Further, the court did not accept the taxpayer’s argument that the tax benefit rule applied in the context of the CNI Tax, so as to require that the gain be calculated using a basis in the partnership interest determined with regard to the taxpayer’s unused losses from the partnership. Finally, the court did not agree that Congress, in effect, overruled IRS Regulation Section 1.111-1 in a 1984 statutory amendment to IRC Section 111.




Joseph C. Bright


(215) 665-2053

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To discuss any questions you may have regarding the opinion discussed in this Alert, or how it may apply to your particular circumstances, please contact: Joseph C. Bright at or 215.665.2053, Dan A. Schulder at or 717.703.5905, Cheryl A. Upham at or 215.665.4193 or Robert M. Careless at or 215.665.4798.