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The recent Pennsylvania Supreme Court decision in Alcatel-Lucent USA, Inc. v. Commonwealth[1] has generated widespread attention and debate concerning the retroactive or prospective application of legal principles. This blog article will discuss the recent decision and its likely impacts.

Majority Rule: Prospective Relief

            During 2014, Pennsylvania law permitted taxpayers to take a net loss carryover deduction of the greater of 25 percent of income or $4 million. Thus, taxpayers with Pennsylvania taxable income below the $4 million cap could deduct their losses, reducing their taxable income to zero.  Meanwhile, taxpayers with income above $4 million were not eligible for the deduction.

During 2017, the Pennsylvania Supreme Court decided Nextel Communications v. Commonwealth[2] – holding that a flat dollar cap on net loss carryover deductions violated Pennsylvania’s uniformity clause.  Following Nextel, the Pennsylvania Supreme Court issued its decision in General Motors[3].  In General Motors, the Court found that its decision in Nextel applied retroactively, and that due process required recalculating General Motors’s income tax without the cap on the net loss carryover deduction.

While Nextel was pending, Alcatel-Lucent filed a refund petition based upon the uniformity issues raised in Nextel.[4]  After Nextel and General Motors were decided, the Commonwealth Court applied the rulings to Alcatel-Lucent, finding in favor of the taxpayer.  The Commonwealth appealed to the Pennsylvania Supreme Court. [5]

On November 20, 2024, the Pennsylvania Supreme Court overturned its decision in General Motors, holding that its decision was erroneous, and Nextel should only apply prospectively. In its decision, the Majority analyzed the three-factor Chevron test for retroactivity, which analyzes: (1) whether the decision creates a new principle of law; (2) the purpose of the rule; and (3) whether there is an injustice or hardship created if the rule is applied retroactively.

            Applying this test, the Majority concluded that: (1) Nextel established a new legal precedent; (2) applying the decision retroactively would not further the purpose of the Nextel ruling; and (3) the equities support applying the decision prospectively only. Notably, in regards to the equity factor, the Majority wrote that, “retroactive application of our decision in Nextel would require the Commonwealth to repay millions of dollars in tax revenue collected and spent nearly a decade ago, based on case law that this Court has since abandoned.”

Alternative Views

            Justices Kevin M. Dougherty, Sallie Updyke Mundy, and Daniel McCaffery issued concurring opinions. While Justice McCaffery agreed with the Majority, that Alcatel-Lucent is not owed a full refund, she reasoned that Pennsylvania law requires taxpayers to demonstrate that they overpaid their taxes if they are seeking a financial remedy under the uniformity clause. Further, Justice McCaffery noted that the Court’s decision to deny the refund, even though the provision is unconstitutional, disincentivizes taxpayers to challenge unconstitutional provisions.

Justice Mundy’s concurrence showed concern that the Majority’s discussion of whether the Nextel decision applies retroactively to other tax laws has the potential to confuse taxpayers further because of the use of short-hand terminology. Rather, to prevent confusion, Justice Munday argued that the Majority’s decision should have only discussed the retroactivity of the statute actually challenged by Alcatel-Lucent.

            Chief Justice Todd, joined by Justice Christine Donohue, agreed with the Majority’s opinion but argued that the Court did not need to overrule its decision in General Motors to apply Nextel prospectively. She explained that General Motors was factually different than Alcatel and, as a result, the Court should limit its decision in General Motors to apply to cases that involve provisions that only provide a flat dollar cap deduction.

            Justice Kevin Brobson issued the sole dissenting opinion. He argued that Alcatel-Lucent was entitled to the refund because its claims were pending while Nextel and General Motors were decided.  He further explained that, while the Court has held that a taxpayer cannot seek a refund after a decision invalidates a tax, the Court has been silent as to whether this applies to claims pending at the time a decision is issued invalidating a tax.

Another Chance?

On December 4, 2024, Alcatel-Lucent filed an application for reargument, asking the Pennsylvania Supreme Court to remand the case. In its application, Alcatel-Lucent argued that since the Court overturned General Motors, Alcatel-Lucent should be given the opportunity to add to the factual record to address retroactivity, third Chevron factor. Alcatel-Lucent hopes that by establishing a more complete factual record, the Court will have the opportunity to consider all relevant facts regarding the equities of applying Nextel retroactively.

Chamberlain Insights

            The Majority’s opinion puts the bulk of its emphasis on the third Chevron factor, concerning whether the relevant equities favor prospective application of Nextel.  Taken to its logical (or illogical) extreme, to avoid paying a refund to taxpayers seeking relief for taxes paid under an unconditional tax statute, the Commonwealth need only argue that a refund could have a large fiscal impact.  As Justice McCaffery correctly pointed out in her concurring opinion, the Court’s decision may impact the ability for taxpayers to obtain refunds, even though a law is unconstitutional.  This, in turn, disincentivizes taxpayers from challenging Pennsylvania Constitutional violations.  

In an attempt to alleviate some concern and incentivize taxpayers to challenge constitutional violations, Justice McCafferty proposed a legislative fix – allowing the recovery of attorney’s fees from the government if it is found to be acting outside of the law, thereby ensuring the government is held accountable.  Since the cost of litigating a refund claim, like Alcatel, can be costly, allowing taxpayers to recover attorneys’ fees at a minimum may help incentivize taxpayers to still challenge constitutional violations.  However, assuming sufficient support exists for its enactment, getting a fix adopted would likely take some time to move through the legislative process.  

Another issue, one raised by Justice Brobson in his dissent, is that that no relief is granted under the Majority’s opinion prior to the date of a decision.  In the present case, Alcatel (a case dealing with the 2014 tax year) was pending at the time Nextel (a case dealing with the 2007 tax year) was decided.  In Pennsylvania specifically, the reality of seeking a refund through litigation is that a case can go undecided for a decade. While the case is pending, a number of other taxpayers can be impacted.  Additionally, while these cases are pending, the State is aware that these issues are being litigated and should be accounting for the fact that there might be a fiscal impact. However, as stated above, taxpayers should be wary of their ability to receive a refund under certain circumstances based on the Court’s analysis in Alcatel.

[1] Alcatel-Lucent USA, Inc. v. Commonwealth, Pa., No. 8 MAP 2023 (Pa. 2024).

[2] Nextel Communications v. Commonwealth, 171 A.3d 682 (Pa. 2017).

[3] General Motors Corp. v. Commonwealth, 265 A.3d. 353 (Pa. 2021).

[4] Alcatel-Lucent USA, Inc. v. Commonwealth, Pa., No. 803 FR 2017 (Pa. 2024).

[5] Alcatel-Lucent USA, Inc. v. Commonwealth, Pa., No. 8 MAP 2023 (Pa. 2024).