The controversy that started in 2009 has come back to haunt the IRS. When the American paper industry came to the IRS to receive $2 billion in fuel tax credits cleared, the IRS did not offer any rulings. In 2009, the IRS said paper companies, which had been generating power by burning black liquor, a pulping by-product, could add a few drops of diesel and qualify for the 50 cents a gallon alternative fuel mixture tax credit.

A news story published in The Washington Post reveals how paper industry companies collected cash payments totalling to billions in tax credits at a time when the economy was in trouble, resembling a federal bailout.

“Tax credits are generally used to reduce taxes paid by individuals or companies. But this was a refundable tax credit, which means that money-losing companies that owed no taxes could collect cash payments from the Treasury for the amount of the credits.

As a result, as the economy reeled from the financial crisis, the Treasury ended up paying $8 billion to ailing paper companies in what amounted to a major, but never openly debated, federal bailout. The move riled members of Congress who had intended the credit to promote pioneering techniques for turning plant matter into fuel. But Congress took no action, and the portion of legislation that created the black liquor credit was allowed to expire at the end of 2009.”

2010 saw opposition to the IRS’s new ruling regarding bio-fuel credits by the Obama administration. The Washington Post discloses the details:

“The IRS in 2010 ruled that black liquor could also qualify retroactively for advanced cellulosic biofuel credits, which were intended to reward innovation in the production of alternative motor fuels. The credit was worth $1.01 a gallon under the 2008 farm bill, but was not refundable and, therefore, only useful for profitable companies. So companies often used a combination of the two tax credits to revise earlier tax returns and maximize income.

The Obama administration budget proposal in early 2010 said the IRS ruling “could result in substantial revenue losses and a windfall to the paper industry,” and legislation later ended the application of the cellulosic credit to black liquor.

The new twist — largely unnoticed — came in 2011. After the congressional uproar subsided, most paper companies amended their 2009 tax returns to gain further advantage. Initially, paper companies had told shareholders in 2009 and 2010 that the refundable alternative fuel credits would be taxed. But in 2011, they quietly declared that the money shouldn’t be taxed. The Treasury ended up refunding about $2 billion in taxes the companies had paid, according to industry experts.”

The generosity of the IRS led to Treasury losses and paper company gains. IRS spokesman, Anthony Burke said, “We didn’t produce any guidance on this.” Burke said the agency never offered “private letter rulings.”