IRS Ruling Helps Pulp Makers Keep Black Liquor Billions

A recent IRS ruling means that pulp and paper companies will not have to pay back several billion dollars in black liquor tax credits.

In fact, as a result of the ruling, at least six companies booked additional credits for First Quarter 2010 even though the controversial eco-credits expired on December 31.

The Feb. 12 decision from the IRS’ Office of Chief Counsel, which apparently became public in late April, states that all of black liquor, not just the portion that is burned to generate electricity at kraft pulp mills, is eligible for the 50-cent-per-gallon “alternative fuel mixture credit.” Black liquor, a molasses-like pulp byproduct, is 40% water and also contains some inorganic compounds that have negative energy value, the ruling noted.

Pulp manufacturers exploited a loophole in an alternative fuel program to garner approximately $8 to $9 billion last year in tax credits for burning black liquor as fuel. With nearly half of black liquor consisting of water or inorganic compounds, an unfavorable ruling on the water content could have negated about $4 billion worth of credits.

Black liquor is a liquid fuel
Citing a precedent involving the water content of coal, the Chief Counsel’s office stated that “the volume of black liquor should not be divided into component parts to calculate the alternative fuel mixture credit and the entire volume of the heavy black liquor is a liquid fuel that is ‘derived from’ biomass.”

Some of the kraft manufacturers were worried enough about the inorganic compounds that they had held off claiming the credits on a portion of the black liquor they burned.

“Due to a potential risk that a portion of the alternative fuel we used might not qualify for the tax credit, we recorded a book reserve of $10 million," explained Randy Levy, Temple Inland CFO, during the company’s recent earnings conference call. Because of the ruling, “what we did was we reversed the reserve and recognized $10 million in alternative fuel mixture tax credits in the first quarter of 2010. Of course that's related to the actual alternative fuel that we used in 2009.”

Others that booked similar First-Quarter income because of the ruling include Domtar ($25 million), Smurfit Stone ($11 million), Packaging Corporation of America ($9 million), KapStone Paper and Packaging ($7.9 million), and Buckeye Technologies ($2.9 million). NewPage recognized $13 million and SAPPI $2 million in black liquor credits during the quarter, but it isn’t clear whether those earnings are related to the IRS ruling.

But most of the 21 publicly traded recipients of the credits, including #1 International Paper, made no reference to the ruling or any reserves for black liquor in their recent earnings statements.

Companies are still waiting for guidance from the IRS on whether black liquor credits are subject to corporate income taxes. Because some of the companies have booked reserves in case the credits are taxable, a favorable ruling would lead to more income related to the credits.

For more information on tax credits for burning black liquor, please see:

• ObamaCare's Black Liquor Tab: $23.6 Billion: The recently passed healthcare legislation assumes huge savings from closing the "Son of Black Liquor" loophole, which didn't even exist.
• News Media and Congress Are Confused About Black Liquor Subsidies: explains the difference between the original black liquor tax credits and the non-existent Son of Black Liquor loophole.
• Grandson of Black Liquor: Congress Milks Another Pulp Byproduct for Bogus Savings: After its success using bogus black liquor savings to help "pay" for healthcare, Congress recently closed another questionable loophole to help pay for jobs legislation.
• What, Exactly, Is Black Liquor? Just Ask the Tax Man