The “Son of Black Liquor” tax credits will probably cost American taxpayers hundreds of millions, if not billions, of additional dollars, but Congress might grab the money without paper manufacturers getting a dime.
Seven publicly traded paper companies have estimated that they will net about $570 million from the IRS’ recent ruling that made black liquor eligible for Cellulosic Biofuel Producer credits (CBPC), reports the Press-Register of Mobile, Alabama. Leading the way are Weyerhaeuser with $240 million (pre-tax) and Domtar with $200 million.
The other 14 publicly traded producers of black liquor, including the largest (International Paper), have not released such projections, partly because of uncertainty about exactly what the June 28 ruling means. (See Pulp Manufacturers Scratching Their Heads Over Son of Black Liquor Ruling for more information about these uncertainties.)
Meanwhile, the IRS’ “generosity” toward companies that produce, and burn, black liquor as part of their pulp-making operations has caught the eye of Congress, writes Jeremiah Coder for Tax Analysts. “The agency’s administrative largesse appears to be prompting members of Congress to consider legislation to retroactively disallow biofuel credits for black liquor claims.”
Sen. Charles Grassley of Iowa, the ranking Republican of Iowa, has asked the Joint Committee on Taxation for a “revenue estimate” on such a move, Coder reports. That is significant in at least three ways:
1) JCT’s estimate of revenue (actually, avoided costs) from overturning the IRS ruling is “likely to immediately become an attractive add-on to any legislation in need of pay-fors,” Coder writes. In other words, Congress could use the savings to pay for a new program and claim that it is not increasing the federal deficit (though it would be, because no money has been budgeted to subsidize the use of black liquor).
2) The JCT blew a previous estimate regarding Son of Black Liquor, saying that disallowing CBPC credits for black liquor from 2010 forward would save only about $25 billion when it could have set the number at $50 billion or more. (See How Google Could Help the Democrats By Buying a Pulp Mill and Black Liquor Bonanza: Earnings Exceeding Projections of Experts and Congress for details.) Congress certainly won’t be happy if the JCT low-balls this opportunity to create some funny money, this time by blocking the issuance of CBPC credits for black liquor used in 2009.
3) To back up its calculation, the JCT may reveal how much was paid out to paper companies from the original black liquor tax credit program. The 21 publicly traded companies reported receiving $6.5 billion from that program, but some big pulp makers like Georgia Pacific are privately held and therefore do not have to real what they received.
The JCT will also need to take a stab at some questions that are bedeviling the pulp makers about how to interpret the IRS ruling. Here’s a look at recent statements from some of the companies about those questions and how Son of Black Liquor might affect them:
- Weyerhaeuser (CFO Patricia Bedient): “During the first part of 2009, we produced approximately 238 million gallons of black liquor, which did not qualify for the alternative fuel mixture credit. This equals $240 million of potential cellulosic biofuel credit at $1.01 per gallon, or $149 million net of tax. Since this credit offsets income tax liability, we could only carry the credit forward. It is still unclear whether the credit can be claimed in the same year as the alternative fuel mixture credit [the original black liquor tax credit]. For the last three quarters of 2009, we claimed $344 million of fuel mixture credit. There's a great deal of uncertainty as to the process for claiming these credits and we are evaluating both credits to determine which credit or mix of credits, if allowed, would add the most value to the company.”
- Domtar: "From January 1, 2009 until we started to claim the Alternative Fuel Tax Credits, we have approximately 200 million gallons of black liquor that may qualify for this CBPC that would represent approximately $200 million of CBPC or approximately $120 million of after tax benefit to the Corporation. In July 2010, we submitted an application with the IRS to be registered for the CBPC. There is, however, a degree of uncertainty related to this credit as we have not received our registration for the credit and we believe there is some lack of clarity with the application of the IRS rules. As such, during the period ended June 30, 2010, we have not recorded any impact related to the CBPC."
- Graphic Packaging Corp. (CFO Dan Blount): “It appears that some in the industry are considering the cellulosic biofuel credit path. We have evaluated this approach. And given our large NOL [net operating loss] position and the fact that the cellulosic biofuel credit can only be used to offset federal income taxes payable, we will not be pursuing this option.”
- Smurfit-Stone (which recently emerged from bankruptcy protection): “Cellulosic biofuel producer credits unlikely to be utilized/relevant.”
- Kapstone Paper & Packaging: "In December 2009, the Company filed its registration as a cellulosic biofuel producer for the year 2009 and is awaiting approval. ..The IRS is expected to provide guidance for converting AFTC’s to cellulosic credits for qualifying producers. … At this time, the Company estimates a $22 million potential future after-tax credit for CBTC relating to black liquor burned in 2009 prior to the Company’s AFTC registrations being approved. If the Company were to receive any tax credits related to cellulosic biofuel it would be realized by reducing income tax payable beginning in late 2010."
- Packaging Corp. of America: "As a result of the IRS guidance, PCA has filed an application to receive the required registration code to claim the cellulosic biofuel producer credit. We expect this registration to be received during the third quarter. PCA has not yet filed a claim for any black liquor credits earned in 2009, since our tax -- 2009 tax return is not due until September 15, 2010. Once the cellulosic biofuel registration is received, PCA can claim the cellulosic biofuel producer credit of $1.01 per gallon instead of the alternative fuel mixture credit of $0.50 per gallon. This would increase our total 2008 and 2009 tax credits to about $370 million or $230 million after-tax, compared to alternative fuel mixture credits of $195 million or a $45 million increase."