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Pennsylvania Supreme Court currently landscape of NOL treatment for state accrual-method taxpayers to recog-
considering an appeal of General Motors income tax purposes, and these recent nize revenue at the earliest of when
Corp. v. Pennsylvania, 222 A.3d 454 developments merely evidence a need revenue is due, earned, received, or
(Pa. Commw. Ct. 2019), in which the to remain vigilant. Taxpayers in loss po- recognized in an applicable financial
applicability of Pennsylvania’s flat-dollar sitions should continue to identify and statement (later termed the AFS
limitation to the taxpayer is at issue. evaluate the impact of these and other income-inclusion rule in the final
New Jersey: Addressing an at- amendments to their anticipated usage regulations). This is significant, as
tempt by the New Jersey Division of state NOLs for both cash flow and the manner in which revenue is
of Taxation to disallow the usage of tax provision purposes. recognized for financial statement
NOLs, the New Jersey Tax Court re- From Jamie C. Yesnowitz, J.D., purposes was also modified under
cently found that the division may not LL.M., Washington, D.C.; Chuck Jones, FASB Accounting Standards
disallow NOLs generated in closed tax CPA, J.D., Chicago; Lori Stolly, CPA, Codification Topic 606, Revenue
years and carried forward to an open Cincinnati; and Patrick K. Skeehan, From Contracts With Customers,
tax year under an audit examination J.D., Philadelphia and IFRS 15 (the new standards).
(R.O.P. Aviation, Inc. v. Director, Divi- These new financial statement rules
sion of Taxation, No. 01323-2018 (N.J. often resulted in an acceleration of
Tax Ct. 5/27/21)). Specifically, the N.J. Tax Accounting revenue, which, in turn, could result
Tax Court found the division’s adjust- in an acceleration of taxable income.
ment of NOL carryforwards created Revenue recognition: Time Lastly, it is important to note that
in closed years was tantamount to the to implement the final Sec. 451(b) should not be construed
adjustment of income reported in those regulations as simple book/tax conformity
years, thus constituting an impermis- The quest to properly report revenue because application of the provision
sible “audit” for closed years outside the for federal income tax purposes con- is much more complicated than a
state’s four-year statute of limitation. tinues as 2021 tax filings will provide conformity rule.
The decision confirms that the division yet another opportunity for taxpay- ■ Sec. 451(c) codified and modified
cannot adjust NOLs generated in tax ers to assess and adjust their revenue the deferral method for advance
periods falling outside the four-year recognition methods. In 2018, the law payments permitted under Rev. Proc.
statute of limitation and carried for- known as the Tax Cuts and Jobs Act 2004-34. It is important to note
ward to offset income in open tax years (TCJA), P.L. 115-97, amended the that the final regulations obsolete
that are audited. Further, it clarifies that Sec. 451 statutory provisions, which Rev. Proc. 2004-34 for tax years
NOLs from tax years that are otherwise substantially modified long-standing beginning on or after Jan. 1, 2021.
closed cannot be disallowed even when revenue recognition rules. Further, late As such, taxpayers need to assess
they impact the computation of income in 2020, the IRS released final revenue the application of Sec. 451(c), and
for open years. The division may still recognition regulations under Sec. 451 the regulations thereunder, to their
appeal this determination. that provided much-needed clarity on particular facts and circumstances
how taxpayers should apply the new to determine their ability to defer
Limitations on NOL usage will Sec. 451 provisions. Lastly, in 2021, revenue recognition relating to
continue Treasury and the IRS released Rev. advance payments.
The recent legislative changes and court Proc. 2021-34, providing the required
decisions in California, Illinois, Kansas, procedural guidance needed for taxpay- Final regulations
New Jersey, and Pennsylvania highlight ers to comply with Sec. 451 and the As one might expect, the new provi-
states’ continuing efforts to limit the final revenue recognition regulations sions provided under the TCJA left
use of NOLs in efforts to raise revenue issued thereunder. taxpayers with many questions relating
and balance their budgets in these chal- to their proper application. In addition,
lenging times. As the economic effects Changes to revenue recognition taxpayers with newfound acceleration
of the pandemic continue to evolve, The new revenue recognition rules of taxable income under Sec. 451(b)
there is little reason to believe that the provided under the TCJA contained were looking for some form of relief
states will become more beneficent with many significant changes for taxpayers. from the AFS income-inclusion rule.
respect to the application of state oper- Among such changes are the following: Treasury responded to taxpayers’ con-
ating loss attributes. Instead, a spotlight ■ Sec. 451(b) effectively modified cerns by issuing final regulations under
is likely to remain on the ever-changing the “all-events test” to require Sec. 451 at the end of 2020. These

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