IRS Offers Guidance on Accounting for Black Liquor Credit Repayments

By Mark Pflug, CPA, Grand Rapids, Mich.

Editor: Michael Dell, CPA

Credits Against Tax

In Program Manager Technical Assistance (PMTA) 2012-017 issued to the chief of the IRS’s Excise Tax Program, the IRS Chief Counsel’s Office addressed under what circumstances interest must accompany a repayment of the alternative fuel mixture credit (AFMC) received under Sec. 6427, and during what year taxpayers converting the AFMC into the cellulosic biofuel producer credit (CBPC) under Sec. 34 should include that credit in income under Sec. 87. Before 2010, black liquor (defined below) qualified for either the refundable AFMC or the nonrefundable CBPC credit. Taxpayers that chose the refundable AFMC credit were permitted to pay it back and submit a claim for the CBPC credit.


Black liquor is a byproduct of the production of paper pulp using the kraft process and is burned by paper companies to generate steam for the production of electricity. Black liquor comprises 75% organic matter and 25% inorganic matter by weight, but it does not include alcohol or biodiesel.

Sec. 6426(e) allows an excise tax credit for alternative fuel mixtures (the AFMC). The credit extends to seven fuels, including liquid fuel derived from biomass. The credit is 50 cents per gallon for each gallon of alternative fuel directly used or put into the mixture and used in the taxpayer’s trade or business. The credit offsets the taxpayer’s excise tax liability, and any excess over that amount permits a taxpayer to file for a “refund” of the excess credit amount under Sec. 6427(e). The credit is not available for liquid fuel derived from biomass after Dec. 31, 2009.

Sec. 40(a) creates a nonrefundable “alcohol credit” for ethanol and methanol produced by the taxpayer and (1) used as a fuel by the taxpayer producing the alcohol in its trade or business or (2) blended by a taxpayer (not necessarily the producer) with a taxable fuel (gasoline, diesel, or kerosene) and sold as a fuel. Effective Jan. 1, 2009, cellulosic biofuel (blended and unblended) was added to this credit. Generally, the CBPC is available for any liquid fuel that is produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis (Sec. 40(b)(6)(E)).

Sec. 87 states that gross income includes the amount of the Sec. 40(a) alcohol credit for the tax year. Sec. 34(a) states that the amount of the Sec. 6427 excise tax credit payable to a taxpayer is allowed as a credit under the income tax. Under Sec. 6426(h), no unit of fuel may receive both the AFMC and the CBPC.

In July 2010, the IRS concluded that taxpayers who had claimed the AFMC could repay any amounts received under that credit and file for the CBPC. A number of paper companies producing and burning black liquor took this opportunity to repay a portion of the AFMC refund and file for the CBPC.

PMTA 2012-017

In PMTA 2012-017, the Chief Counsel determined that taxpayers do not owe interest on the repayment of a refund received under Sec. 6427 or on the repayment of a tax credit claimed under Sec. 34 unless it reduced the amount of income tax due. However, if the refund under Sec. 34 does reduce the amount of tax due, then interest is required to be calculated under Sec. 6601 with an offset allowed for interest computed under Sec. 6611.

Additionally, the Chief Counsel determined that Sec. 87 income should be included in the year the taxpayer qualified for the credit even if some of that credit is limited by Sec. 38(c). A taxpayer’s method of accounting does not alter these determinations.


This technical assistance provides certainty that a taxpayer who returns all or part of (1) the excise benefit that was received under Sec. 6426 as a Sec. 6427 cash payment or (2) the income tax benefit under Secs. 34 and 40, which did not offset the taxpayer’s tax liability, does not incur a liability for interest computed in connection with the passage of time between the date the benefit was received and the date when repayment was undertaken. If the benefit was used to offset the taxpayer’s tax liability, then interest is due and must be computed under Sec. 6601, with an allowable offset for interest computed under Sec. 6611 for the same period.

The technical assistance also clarified that, under Sec. 87, a taxpayer who is filing an amended return converting an AFMC into a CBPC must take a similar amount into gross income for the year in which the taxpayer qualifies for the credit, regardless of any limitations on the taxpayer’s ability to currently use the credit.

This determination will allow a taxpayer to undertake a review of the value of a conversion of Sec. 6427 cash benefits, realized at 50 cents per gallon, to Sec. 40 credits at $1.01 per gallon, without the burden of an interest charge.


Michael Dell is a partner with Ernst & Young LLP in Washington, D.C.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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