PLR 1042018: Black liquor used as fuel qualified for the 2009 cellulosic biofuel credit

Plain-English summary

The IRS considered whether black liquor produced from wood and used as fuel by a pulp mill during calendar year 2009 was cellulosic biofuel under IRC § 40(b)(6)(E). It concluded that black liquor is a liquid fuel produced from renewable lignocellulosic or hemicellulosic material and that it met the applicable EPA registration requirement because it was not a motor vehicle fuel or fuel additive requiring registration. The IRS therefore ruled that the black liquor qualified as cellulosic biofuel under the law in effect during 2009. The related credit was allowable if the registration requirements of § 40(b)(6)(G) were satisfied. The ruling did not address the later statutory amendment that affected fuels containing significant water, sediment, or ash content.

Ruling snapshot

• Question: Did black liquor produced and used as fuel during 2009 qualify as cellulosic biofuel for the § 40(b)(6) credit?
• Outcome: Approved
• Key authorities: IRC §§ 40(a)(4), 40(b)(6)(E), 40(b)(6)(G), and 6110(k)(3); Clean Air Act § 211, 42 U.S.C. § 7545

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201042018 Third Party Communication: None
Release Date: 10/22/2010 Date of Communication: Not Applicable
Index Number: 40.00-00
Person To Contact:
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------------- Telephone Number:
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---------------------------------- Refer Reply To:
CC:PSI:B07
PLR-118382-10
Date:
July 14, 2010

              TY:--------

Legend

Taxpayer = -------------
Subsidiary = ----------------------------

Dear --------------:

  This document replies to a letter ruling request dated April 28, 2010, submitted

on your behalf by your authorized representative, regarding the application of the
§ 40(b)(6) cellulosic biofuel producer credit of the Internal Revenue Code (the Code).
You request a ruling regarding the application of this credit to “black liquor” produced by
your Subsidiary. Specifically, you request a ruling that the black liquor produced and
used as a fuel by Subsidiary during calendar year 2009 is cellulosic biofuel within the
meaning of § 40(b)(6)(E).

FACTS

    During calendar year 2009, Taxpayer owned Subsidiary, a pulp mill located in the

United States that uses the semi-chemical pulping process to convert wood chips into
pulp for paper production. In this process, wood chips are “cooked” with a water-based
solution of inorganic chemicals at elevated temperatures to weaken the bonds between
cellulose and lignin. During the “cooking,” the inorganic chemicals bond to the lignin
and the cellulose is extracted for further processing as pulp for paper. The by-product
of this process, black liquor, is an aqueous solution consisting of lignin residues,
hemicelluloses, and various inorganic chemicals. The black liquor is further processed
to remove much of the water content and then used as a fuel source in a recovery boiler
PLR-118382-10 2

that produces steam used by the pulp mill. Before being used as a fuel, the black liquor
is temporarily stored in tanks.

   Neither Taxpayer nor Subsidiary has claimed any credits or payments under

§ 6426, 6427, or 34 relating to the production, sale, or use of the black liquor.
Subsidiary submitted an application to the Internal Revenue Service (IRS) to be
registered by the IRS as a producer of cellulosic biofuel (the “CB” activity letter suffix) on
Form 637, Application for Registration (For Certain Excise Tax Activities).

LAW & ANALYSIS

   Sections 40(a)(4) and 40(b)(6)1 of the Code, as in effect for the periods at issue,

allow a nonrefundable income tax credit to the registered producer of cellulosic biofuel
for each gallon of cellulosic biofuel it produces in the United States and sells for use or
uses in a trade or business in the United States. Section 40(b)(6)(E)(i) defines
cellulosic biofuel to mean any liquid fuel that: (I) is produced from any lignocellulosic or
hemicellulosic material that is available on a renewable or recurring basis, and (II)
meets the registration requirements for fuels and fuel additives established by the
Environmental Protection Agency (EPA) under section 211 of the Clean Air Act (42
U.S.C. 7545).

   Black liquor is a liquid fuel produced from wood, which is a lignocellulosic or

hemicellulosic material that is available on a renewable or recurring basis. Thus, black
liquor meets the requirement of § 40(b)(6)(E)(i)(I).

    Section 40(b)(6)(E)(i)(II) requires fuel to "meet" EPA's registration requirements

for fuel and fuel additives under section 211 of the Clean Air Act. The IRS has generally
determined that fuel meets EPA’s registration requirements if the EPA does not require
the fuel to be registered. EPA requires registration only of motor vehicle fuels and fuel
additives. Thus, because black liquor is not a motor vehicle fuel or fuel additive, black
liquor “meets” EPA’s registration requirements for purposes of § 40(b)(6)(E)(i)(II).

    Because black liquor meets both parts of the definition of cellulosic biofuel, black

liquor that is produced before January 1, 2010, is cellulosic biofuel under § 40(b)(6)(E).

1
The Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152) (the
Reconciliation Act) amends the definition of cellulosic biofuel, effective for fuels sold or
used after December 31, 2009. The technical explanation (JCX-18-10, Technical
Explanation of the Revenue Provisions of the “Reconciliation Act of 2010,” as Amended,
in Combination with the “Patient Protection and Affordable Care Act”, March 21, 2010)
to the revenue provisions of the Reconciliation Act states that as a result of the
amendment, the cellulosic biofuel producer credit “cease[s] to be available” for “fuels
containing significant water, sediment, or ash content, such as black liquor.”
PLR-118382-10 3

For the cellulosic biofuel producer credit to be allowed, the provisions of § 40(b)(6)(G),
relating to registration requirements, must be met.

CONCLUSION

   The black liquor produced and used as a fuel during calendar year 2009 is

cellulosic biofuel as defined in § 40(b)(6)(E) of the Code, as in effect during the period at
issue. Thus, the credit is allowable if the requirements of § 40(b)(6)(G) are met.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of
the material submitted in support of the request for rulings, it is subject to verification on
examination.

                                    Sincerely,



                                    Frank K. Boland
                                    Chief, Branch 7
                                    Office of Associate Chief Counsel
                                    (Passthroughs & Special Industries)

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