IRS Inaction Leads to Another Black-Liquor Windfall for U.S. Paper Companies

First there were the black liquor tax credits. Then there was Son of Black Liquor. And now there's The Creature From the Black Liquor Lagoon, another IRS handout to the U.S. paper industry

IRS inaction has led to an approximately $2 billion windfall for U.S. paper companies that burn black liquor, according to the reporter who originally broke the story about black liquor tax credits in 2009.

Steven Mufson of the Washington Post recently chronicled how paper companies originally thought the Alternative Fuel Mixture tax credits they received in 2009 would be taxable income. But when some companies changed to treating the credits as non-taxable, "IRS examination agents were told to stand down and not challenge the position that the refundable credits were not taxable income," one IRS employee said.

"If the IRS says nothing, the returns will go unchallenged, and the companies will keep the money," Mufson wrote. "The agency still has not issued a ruling — even as the clock runs on the statute of limitations for challenging the companies’ interpretation. For some companies, time could expire this fall."

International Paper originally set aside money to pay for income taxes on the $2.1 billion the IRS handed it for burning black liquor, a pulp byproduct. But it booked $700 million in additional income when it switched to treating the credits as non-taxable. All for doing something that had been standard operating procedure around the world for decades -- burning black liquor, a hazardous pulp byproduct, to provide energy for its pulp mills.

Mufson's tale of black-liquor boondoggles, lobbying by paper companies, and a politicized IRS is well worth the read. But the picture is actually worse than he presents in several ways:

•  Mufson puts the tab for the original black liquor credits as $8 billion, but that appears to be on the low side. Publicly traded companies reported $6.6 billion in credits. But we don't know what was handed out to privately held companies, which owned more than one-fourth of the country's kraft pulp capacity when the Alternative Fuel Mixture tax credits were being handed out.
• After the original tax credits program was ended, paper companies received additional money via what's come to be known as the Son of Black Liquor tax credits, officially known as the Cellulosic Biofuel Producer Credits. Paper companies have not been able to use all their credits yet, but when all is said and done the tab will probably be several billion dollars.
• IRS inaction hasn't been its only sin. Questionable rulings from the IRS (See IRS Ruling Helps Pulp Makers Keep Black Liquor Billions and Pulp Manufacturers Scratching Their Heads Over Son of Black Liquor Ruling, for example) made Son of Black Liquor possible and boosted the payouts for the original credits.

 Background: Since 2009, Dead Tree Edition has published more than 50 articles about the twisted tale of black liquor bailouts. How Democrats Helped Finance the Tea Party With Black Liquor provides a taste of the tale's many ironies.