Black liquor, a byproduct of the wood pulping process, is an alternative fuel under the IRS Code.  In addition, when black liquor is combined with at least 0.1% diesel fuel, it is eligible for the Alternative Fuel Mixture Credit (AFMC). During 2009, the IRS allowed a $0.50 per gallon tax credit for the alternative fuel mixtures produced and used as a fuel. AFMC expired on December 31, 2009.

This year, in an IRS memo dated June 28, 2010, the IRS concluded that black liquor sold or used in 2009 also qualifies for the Cellulosic Biofuel Producer Credit (CBPC) at $1.01 per gallon. Thus, black liquor potentially qualifies for either AFMC or CBPC (but not both on the same gallon of black liquor), and the IRS has provided instructions which would allow a taxpayer to refund AFMC credits already received and claim the higher CBPC.  Under current law, only qualified fuel produced between January 1, 2009 and December 31, 2012 for use in the U.S. may be eligible for CBPC.

Last year, Weyerhaeuser (WY), which is in the final stages of converting to a REIT, used approximately 688 million gallons of the alternative fuel mixture through December 31, 2009, resulting in $344 million of credits. Additionally, WY produced approximately 238 million gallons of black liquor, which did not qualify for AFMC. The company now expects $240 million of potential CBPC on these gallons in Q4 2010. The company also stated that it is evaluating both credits to determine which credit or mix of credits will be most valuable.

Rayonier (RYN) qualified for tax credits of approximately $215 million in 2009 for AFMC. The company will now file an amended 2009 federal income tax return to claim the cellulosic credit. Rayonier expects to realize the entire cash benefit during 2011 to be a refund of 2009 and 2010 taxes and offsetting 2011 estimated taxes.