Thursday, July 15, 2010

IRS Brings Son of Black Liquor Back From the Dead; Ruling May Be Worth Billions to U.S. Pulp Makers

The Internal Revenue Service may have handed U.S. pulp and paper companies a multibillion-dollar gift by ruling that black liquor produced in 2009 is eligible for an even more lucrative tax credit than the one claimed by manufacturers last year.

The June 28 ruling contradicts previous guidance from the Environmental Protection Agency that the molasses-like pulp byproduct could not qualify for Cellulosic Biofuel Producer Credits (CBPC) because it is not a motor-vehicle fuel or fuel additive. The new IRS ruling does not allow the same black liquor to receive both the original black liquor credits ("alternative fuel mixture") and CBPCs, the so-called Son of Black Liquor tax credits.

The exact impact of the ruling is unclear, but in theory it could be worth more than $10 billion to U.S. companies.

Publicly traded U.S. companies received more than $6.5 billion in black liquor tax credits last year by exploiting a loophole in legislation designed to subsidize "green" fuels. Privately held companies probably qualified for at least another $2 billion.

CBPCs are paid at the rate of $1.01 per gallon, versus 50 cents for the original black liquor credits, so there could be $8 billion to $9 billion available if companies can refund the black liquor tax credits they have already received so that they can get the CBPCs instead. The IRS ruling provides no guidance on that point.

Late to the party
Also, many pulp makers were late to the black liquor party last year, not qualifying for the credits until several months had passed. Publicly traded companies received about $800 million more credits in the second half of the year than the first, suggesting they produced about 1.6 billion gallons of black liquor in 2009 that did not receive the credits. Add in privately held companies and there's probably at least 2 billion gallons -- worth more than $2 billion in CBPCs -- that could qualify without the companies having first to return money to the IRS.

Because it can only be used to reduce income-tax payments, rather than being a direct payment like the original black liquor tax credits, CBPC may not be of much benefit to unprofitable or barely profitable companies. The credits, however, can be carried forward for several years, which could be helpful to the many pulp makers that paid no income taxes for 2009 but are more profitable this year. The ability to use the credits in subsequent years could make unprofitable companies more attractive for acquisition by profitable ones.

The alternative fuel mixture program expired at the end of 2009. The "ObamaCare" healthcare legislation disqualifies black liquor for CBPCs starting on Jan. 1, 2010 but had no impact on 2009, the first year of the program.

Pulp makers have already applied
"For black liquor sold or used before January 1, 2010, however, a number of black liquor producers have indicated they intend to claim a [CBPC] credit," the ruling says. "In addition, a number of these black liquor producers have applied to the IRS . . . to be registered by the IRS as producers of cellulosic biofuel."

Prior to the ruling, several pulp makers had said they did not expect any further tax credits from black liquor. A presentation from International Paper -- which could net more than $2 billion from the ruling -- stated last year "we believe that pulp & paper producers do not qualify" for CBPCs.

The IRS ruling acknowledges that one requirement for a substance to receive CBPCs is that it "meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency (EPA) under section 211 of the Clean Air Act". Because those registration requirements only apply to motor vehicle fuels and fuel additives, an EPA official indicated last year that the CBPC law apparently excludes black liquor, which is not suitable for motors.

But the new ruling cites previous IRS guidance (in logic that only a lawyer could love) stating that a "fuel meets the EPA registration requirements if the EPA does not require the fuel to be registered."

"Cellulosic fuel that is not used for fuel in a motor vehicle does not have to be registered by the EPA," the ruling adds. "Practically speaking, black liquor cannot be used as a fuel in a motor vehicle."


Frank Locantore said...

There is absolutely no doubt that taking advantage of this resuscitated loop-hole will be damaging to the environment, increase climate change impacts, and hurt the recycled paper industry.

Environmentally responsible paper companies should publicly state that they will not participate and will not take advantage of this loop-hole. The EPA should figure out some way to close this IRS loop-hole. And paper purchasers should be asking their paper companies and suppliers what their position is on this federal government tax break; and, they should refuse doing business with them if they continue to squeeze the tax-payers by taking advantage of a provision that is supposed to support cleaner energy production - and that definitely does not include burning "black liquor!"

Good Grief.

Anonymous said...

This is a tax credit, right, not the direct cash payment that paper makers got in 2009 through the black liquor subsidy? So, a company like NewPage wouldn't get anything because they're losing money and thus there's no tax liability? I assume you have to have income that's taxed to get benefit from the tax break. NewPage lost $300 million in 2009 (even after you count the $300 million they got in black liquor subsidies), so I assume this doesn't help them, but I'm obviously no tax expert.

Anonymous said...

Correct, New Page would not benefit from the new credit. However, a profitable company could aquire them and then use the credit.