Black Liquor Tax Credits: The Gift That Keeps on Giving To Paper Mills -- and Taking From Taxpayers

Six months after questioning whether it would benefit from "Son of Black Liquor", International Paper announced Thursday it got $40 million of the bogus eco-fuel tax credits.

The giant papermaker received the Cellulosic Biofuel Producer Credits in the 4th Quarter of 2010 for burning black liquor, a pulp byproduct, to power its pulp mills in 2009. As with the original black liquor credits -- the Alternative Fuel Mixture Credits program that gave more than $2 billion in taxpayers' money to IP during 2009 -- CBPC (Son of Black Liquor) was intended to spur development of new bio-fuels but mostly rewarded pulp mills for doing what they would have done anyway.

The Son of Black Liquor credits IP claimed were "just the benefit on black liquor gallons that we ran in 2009 but did not mix" with diesel fuel, Timothy Nicholls, the company's CFO, said Thursday during a conference call with stock analysts. Black liquor had to be mixed with diesel to qualify for the original black liquor credits but not for Son of Black Liquor.

"IP cannot quantify the value of additional CBPC because it depends on future taxable earnings, but it could be significant," a company presentation said.

Less than a year ago, IP was apparently not bothering to seek CBPC money because it believed -- as did Dead Tree Edition -- that black liquor would not qualify. And even after an odd IRS ruling that opened the door, Nicholls told analysts this past summer "We don't see a huge benefit for the company."

Even now, Nicholls is unsure about the future benefits from Son of Black Liquor. IP would have to return some of the AFMC money to receive the more lucrative CBPC credits. Though it's been more than a year since pulp mills could earn credits under either program, the tax status of the AFM money is still unclear.

"There's some reason to believe that the proper conclusion maybe non-taxable," Nichols said. "If we come to that conclusion, then economically it just doesn't make sense to refund or payback the credit that we've already received and apply for the CB credit."

Rock-Tenn sees things differently. The packaging manufacturer's most recent annual report says AFMC "is not taxable for federal or state income tax purposes." But it estimates it will eventually net $112 million by paying back the original black liquor credits to get the more lucrative Son of Black Liquor money.

Packaging Corporation of America, which has about one-eighth of IP's pulp capacity, recorded $135.5 million in Son of Black Liquor credits last year. Domtar, which is also the #1 beneficiary of Canada's black-liquor program, reported $127 million in Son of Black Liquor credits last quarter.

Those earnings reports are news to Congress' Joint Committee on Taxation, which in December estimated that the government's cost for all "credits for alcohol fuels", including CBPC, for fiscal years 2010-2014 would only be $100 million.

For more information on the black liquor boondoggles, please see:

• Son of Black Liquor Money Starts Rolling In For U.S. Pulp Makers 
• How Democrats Helped Finance the Tea Party With Black Liquor
• U.S. Taxpayers' Black Liquor Tab Surpasses $30 Billion
• All 45 (and counting) Dead Tree Edition articles on black liquor