CCA 200941011: Black liquor can qualify for an alternative-fuel mixture credit

Plain-English summary

This Chief Counsel advice considers four questions about black liquor produced by paper mills. It concludes that black liquor is a liquid fuel derived from biomass and that blending it with at least 0.1 percent diesel fuel creates an alternative fuel mixture for the section 6426(e) credit. Once registered, a claimant may claim the mixture credit for open past periods, subject to the applicable filing rules. The advice also concludes that black liquor may qualify for either the section 40(b)(6) cellulosic biofuel producer credit or the section 6426(e) mixture credit, but not both.

Ruling snapshot

• Question: Does black liquor qualify as biomass-derived fuel, and can its producer claim alternative-fuel or cellulosic-biofuel credits?
• Outcome: Advice given, with affirmative conclusions subject to the stated credit-election and registration rules.
• Key authorities: IRC §§ 34, 40(b)(6), 40(f), 45K(c)(3), 4101, 6426(d)(2)(G), 6426(e), 6426(h), 6427(e), and 6427(i)(3); Notice 2006-92.

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service
Memorandum
Number: 200941011
Release Date: 10/9/2009
CC:PSI:B07:TCortright
POSTN-135282-09

UILC: 6426.00-00

date: June 03, 2009
to: Director, Specialty Tax
(John Imoff)

from: Associate Chief Counsel
(Passthroughs & Special Industries)

subject: Black Liquor; Excise Tax Credits

ISSUES

This responds to your request for advice on the following issues:

(1) Whether black liquor, as described below, is a liquid fuel derived from
biomass under § 6426(d)(2)(G) of the Internal Revenue Code (the Code).

(2) Whether the process of combining black liquor with diesel fuel described
below creates an alternative fuel mixture for purposes of determining the alternative fuel
mixture credit under § 6426(e) of the Code.

(3) Whether a registrant may claim the alternative fuel mixture credit under

§ 6426(e) of the Code for a mixture produced and used before the date the claimant is
registered by the IRS under § 4101 of the Code.

(4) Whether black liquor qualifies for the cellulosic biofuel producer credit in

§ 40(b)(6) of the Code.

POSTN-135282-09
2

CONCLUSIONS

(1) Black liquor, as described above, is a liquid fuel derived from biomass under

§ 6426(d)(2)(G).

(2) The process of combining black liquor with diesel fuel described above

creates an alternative fuel mixture for purposes of determining the alternative fuel

mixture credit under § 6426(e).

(3) A registrant may claim the alternative fuel mixture credit under § 6426(e) of

the Code for a mixture produced and used before the date the claimant is registered by

the IRS under § 4101 for any open past period.

(4) Black liquor may qualify for the § 40(b)(6) cellulosic biofuel producer credit or

the § 6426(e) alternative fuel mixture credit, but not both.

FACTS

Based on the facts provided, black liquor is the name given to a byproduct of the

paper milling process in kraft mills. Generally, wood chips from debarked tree logs are

pulped by using certain chemicals (called white liquor), heat, and pressure to separate

lignin and other components of the wood from the cellulose fibers in the wood chips.

The cellulose fibers are separated for further processing into paper.

The remaining black liquor (including the lignin and spent chemicals) is an

aqueous solution with the consistency of molasses. Its chemical composition often

includes approximately 75% organic matter and 25% inorganic matter by weight,

depending of the type of wood chips used, but does not include alcohol or biodiesel.

Black liquor is generally not stored because of the continuous nature of the kraft milling

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process; however, when it is stored, it must be kept in a container and cannot be stored

in a pile like sand or wood chips.

After being separated from the cellulose, black liquor is concentrated to remove much of

the water content and is blended with at least 0.1 percent (by volume) of diesel fuel.

The temperature of the black liquor and diesel fuel combination is increased before the

combination is sprayed into a recovery boiler for combustion. The diesel fuel is added

only to support the alternative fuel mixture credit; otherwise, there is no practical reason

to add the diesel fuel. In the recovery boiler, the diesel fuel and the organic matter of

the black liquor are burned away, generating steam to produce electrical energy. (Most

of the inorganic matter is recycled into the kraft milling process as white liquor.) The

electricity powers the paper mill and any excess can be sold to third parties, such as

power companies.

LAW AND ANALYSIS

Effective October 1, 2006, § 6426(e)(1) of the Code allows a 50 cents credit

against a claimant’s taxable fuel liability for each gallon of alternative fuel used to

produce an alternative fuel mixture that the mixture producer sells for use or uses as a

fuel in its trade or business. Section 6426(e)(2) provides that “alternative fuel mixture”

means a mixture of alternative fuel and taxable fuel (that is, gasoline, diesel fuel, or

kerosene) that is sold for use or used as a fuel by the mixture producer.

Under section 2(b) of Notice 2006-92, 2006-2 C.B. 774, “alternative fuel mixture”

means a mixture of alternative fuel and taxable fuel that contains at least 0.1 percent of

taxable fuel. Section 2(f)(1) provides that a mixture is “used as a fuel” when it is

consumed in the production of energy, including in a furnace to produce heat.

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Under § 6426(d)(2)(G), “alternative fuel” includes liquid fuel derived from biomass

(as defined in section 45K(c)(3)). Section 45K(c)(3) defines “biomass” as any organic

matter other than oil and natural gas (or any product thereof), and coal (including lignite)

or any product thereof.

Claimants that have an alternative fuel mixture credit amount that exceeds their

taxable fuel tax liability may claim a payment for the excess under § 6427(e)(1). These

claims for payment may also be made as a claim for a refundable income tax credit

under § 34 on the claimant’s income tax return.

Under § 6427(e)(4), each alternative fuel mixture claimant must be registered by

the IRS before making any claim. But once registered, a claimant may claim for any

open past period. Section 6427(i)(3) provides that an alternative fuel mixture credit

claim must be made on or before the last day of the first quarter following the following

the earliest quarter included in the claim. (For example, a claim that includes January 1

must be made by June 30.) However, if a claimant did not file a timely claim under the

rules of § 6427(i)(3) because the claimant was not registered by the IRS, the claim may

be made instead under § 34 on a timely filed or amended income tax return after the

claimant is registered by the IRS.

Section 15332 of the Food, Conservation, and Energy Act of 2008 (Pub. L. 110-

234) added the cellulosic biofuel producer credit to § 40(b)(6) of the Code. As relevant

to black liquor, § 40(b)(6) allows a $1.01 per gallon nonrefundable income tax credit for

each gallon of qualified cellulosic biofuel production of the producer for the taxable year.

“Cellulosic biofuel” means any liquid fuel that is (1) produced in the United States and

used as fuel in the United States, (2) derived from lignocellulosic or hemicellulosic

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matter that is available on a renewable or recurring basis and, (3) meets the registration

requirements for fuels and fuel additives established by the EPA under section 211 of

the Clean Air Act.

Under § 40(b)(6)(G), the producer of the cellulosic biofuel must be registered by

the IRS before making any claim. However, once registered, a claimant may claim for

any open past period on a timely filed or amended income tax return.

Under § 6426(h), no alternative fuel mixture credit will be determined with respect

to any fuel with respect to which credit may be determined under § 40. Therefore, a

taxpayer that produces an alternative fuel that is also a qualified cellulosic biofuel may

not claim a credit under both § 6426(e) and § 40. However, under § 40(f), the taxpayer

may elect out of the § 40 credits. Thus, an alternative fuel mixture credit may be

determined under § 6426 for an alternative fuel that meets both § 6426(d)(2)(G) (liquid

fuel derived from biomass) and § 40(b)(6)(E) (cellulosic biofuel).

Black liquor, derived from organic matter, is an aqueous solution that has the

consistency of molasses at the time it is introduced into the recovery boiler. Black

liquor, either with or without the addition of taxable fuel, is consumed in the production

of energy to generate electricity in recovery boilers in certain paper mills. Thus, it is

a liquid fuel derived from biomass and the addition of taxable fuel described above

creates an alternative fuel mixture that is used as a fuel by the mixture producer.

CONTACT INFORMATION

If you have any questions about this, please contact Taylor Cortright at

(202) 622-3130.