U.S. Paper Makers’ Black-Liquor Tax Break May Soar

International Paper Co., Weyerhaeuser Co. and other pulp and paper makers may be eligible for U.S. tax credits of as much as $25 billion through 2012, far exceeding the so-called black-liquor benefits that bolstered profit this year, equity and tax analysts said in reports today.

Paper companies currently qualify for alternative-fuel tax credits of 50 cents a gallon to burn black liquor, a wood byproduct from pulp-making. An Internal Revenue Service document shows they may instead qualify for a $1.01-a-gallon credit for producing the cellulosic biofuel, according to Mark Connelly, an analyst at Sterne, Agee & Leach Inc., and Marty A. Sullivan of Falls Church, Virginia-based Tax Analysts.

The tax rule the companies used to claim about $2.5 billion in breaks in this year’s first half expires in December and Congress had already debating closing the loophole, the analysts said in separate reports. The cellulosic biofuel program would both offer a bigger break per gallon and run three more years.

“Think of this as a potential black-liquor II,” Connelly, who is based in New York, said today in a telephone interview. “The significance is that the unintended benefit from black liquor may not only be not expiring as expected, it actually appears to be expanding.”

Connelly and Sullivan, whose firm publishes the Tax Notes weekly journal, both cited an IRS memo dated June 3 that was made public earlier this month. The companies cannot claim both credits at the same time, the IRS memo said.

$25 Billion Estimate

“Exercising a revenue estimator’s prerogative to substitute judgment in the absence of hard data, we arrive at a forecast of $25 billion in tax reductions for pulp producers claiming the cellulosic biofuel tax credit over the next three years,” Sullivan said today in a note to clients.

Not everyone is convinced U.S. pulp and paper producers are in for another windfall.

“The conclusion that this is black-liquor II is dubious,” Jeff Trinca, a forest-products industry lobbyist at Van Scoyoc & Associates in Washington, D.C., said today by phone.

References to cellulosic biofuel in the U.S. tax code suggest producers may claim credits only if black liquor is used as an ingredient in transportation fuel, Trinca said.

Black liquor is a thick, dark liquid created when wood is transformed into pulp, which is then dried to make paper. To qualify for the original alternative-fuel tax credit, producers mix at least 0.1 percent of diesel fuel with black liquor.

‘Much More Profitable’

“The significance of the black-liquor credits is that companies that might have gone bankrupt in this economic downturn have survived and companies that were profitable were made much more profitable,” Connelly said today by phone.

Unlike the original black-liquor credits, potential credits on production of cellulosic biofuel may only be available to companies that have taxable income, he said.

Memphis, Tennessee-based International Paper received more than $1 billion in black-liquor credits in the six months ended June 30, according to a July 30 statement.

“We’re looking at this new information right now and are trying to understand the analysis,” Kathleen Bark, a spokeswoman for International Paper, said today.

Bruce Amundson, a spokesman for Federal Way, Washington-based Weyerhaeuser, said his company was “reviewing” today’s information about cellulosic biofuel credits.

International Paper rose 93 cents, or 3.8 percent, to $25.33 at 4:15 p.m. in New York Stock Exchange trading. The shares have more than doubled this year. Weyerhaeuser climbed 77 cents, or 2 percent, to $40.

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