International Paper's Black Liquor Credit
In 2004, Congress passed the American Jobs Creation Act of 2004 (AJCA). Several corporate benefits were included in this sweeping legislation, including the introduction of tax credits to encourage the development and use of alcohol and biodiesel fuels. Specifically, the Alternative Fuel Mixture Credit (AFMC) was structured as a refundable excise tax credit equal to 50 cents per gallon of alternative fuel produced. In 2008, paper manufacturers recognized an opportunity. If they added diesel fuel-which is not considered an alternative or clean fuel source-to black liquor, a natural byproduct of paper pulp processing, the resulting substance would be classified as an alternative fuel mixture that could potentially qualify for the AFMC. By mid-2009, every public company in the U.S. paper processing industry was receiving these credits. Because the credits were "refundable," and firms in the struggling paper industry did not have taxable income, the AFMCs generated tax savings from the U.S. Treasury totaling $6.4 billion, some of which was received in cash. This case examines the arguments around whether the refundable credits are taxable and discusses Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). The case highlights International Paper as an example and presents analysis by the faculty authors on the three ways in which paper companies approached the AFMC.