IRS Ruling Shields ‘Black Liquor’ Break for International Paper

The U.S. Internal Revenue Service said it won’t reduce a tax credit that paper companies have claimed for converting a pulp-making byproduct into fuel, in a ruling one analyst said preserves benefits for International Paper Co. (IP) and Weyerhaeuser Co. (WY)

The IRS ruling involves a 50-cents-per-gallon tax credit that paper companies claimed for converting so-called black liquor, a byproduct of the pulp-making process, into fuel. The credit expired Dec. 31, and the IRS ruling will apply to credits claimed by companies before then.

A Feb. 12 memorandum, released today, ensures the IRS won’t try to force companies to return part of the credit during audits, said Robert Willens, president of Robert Willens LLC, a firm that analyzes tax and accounting rules for Wall Street clients.

“Prior credits are safe,” Willens said in an e-mail. He told clients in a memo that the IRS ruling means “none of the paper makers who received the benefits of alternative-fuel mixture credits will be asked to return” part of those credits to the U.S.

The memo by IRS lawyers, answering an inquiry by an agency auditor, named no companies, which were projected by Congress’s Joint Committee on Taxation to collect about $6.6 billion from the benefit last year.

The memo said auditors can’t disallow part of the 50 cents- per-gallon credit to factor out wood chips, water and inorganic solids used when converting black liquor into fuel.

Diesel Fuel

Under the tax law, companies were able to claim about $500 for blending the equivalent of one gallon of diesel fuel into 999 gallons of black liquor, according to an estimate last year by Kevin Mason, a forest-products analyst at ERA Equity Research Associates Inc. in Gibsons, British Columbia.

International Paper claimed $1.8 billion in black liquor tax credits last year, including $469 million in the fourth quarter, $525 million in credits in the third quarter, $482 million in the second quarter and $330 million in the first quarter.

Weyerhaeuser reported $344 million in black liquor tax credits in 2009, according to filings with the U.S. Securities and Exchange Commission.

Separately, Congress is moving to prohibit companies from claiming a more generous $1.01-per-gallon tax credit for using a different process to convert black liquor into a cellulosic biofuel.

The IRS ruled in June that some companies could qualify for the higher credit, although some companies and their trade association, the American Forest & Paper Association, said they never intended to claim the benefit. The congressional Joint Committee on Taxation also concluded such claims might be valid, prompting Congress to propose barring the credit to help offset the cost of its health-care overhaul.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

To contact the editor responsible for this story: Jim Kirk at jkirk12@bloomberg.net.

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