Wednesday, January 11, 2012

Ruling Will Boost Pulp Makers' Gains from Black Liquor Boondoggle

A favorable ruling from a Congressional committee will add millions more dollars to what U.S. pulp and paper companies gained from the infamous black liquor tax credits.

KapStone Paper and Packaging announced yesterday that the Joint Committee on Taxation had accepted its position that the $186 million in black liquor credits it earned in 2009 are not taxable income. As a result, it is claiming $63.6 million in "gross unrecognized tax benefits and accrued interest expense" -- and Deutsche Bank upgraded its stock from "Hold" to "Buy".

Pulp manufacturers exploited a loophole in a renewable-fuel tax credit program to gain at least $8 billion in direct payments from the federal government in 2009. The government "rewarded" them for burning black liquor, a pulp byproduct, to power their operations, which they would have done even without the tax credits.

"The 'black liquor' scandal is the most notorious recent instance of the pitfalls of congressional efforts to pick and subsidize winners," Michael J. Graetz, a tax law professor at Columbia University, wrote recently in Wired magazine.

Most of the 21 publicly traded companies that received the black liquor payments also apparently thought they were not subject to income taxes. But like KapStone, some may have set aside money just in case.

At least one, Buckeye Technologies, had treated part of its $130 million windfall as taxable income. Exactly how much Buckeye has to gain from the KapStone precedent is not clear because the company has begun returning some of its black liquor tax credits to the IRS so that it can claim the more lucrative "Son of Black Liquor" tax credits.

KapStone was facing "the worst conditions I've seen in my career" in early 2009 before discovering "the miracle" of black liquor tax credits, CEO Roger Stone has said. The company ended that year with record earnings and cash flow.

For more background on the black liquor and Son of Black Liquor tax credits, please see:

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