United States General Accounting Office 

GAO Report to Congressional Requesters 

September 2003 TAX 

ADMINISTRATION 

Information Is Not 

Available to 

Determine Whether 

$5 Billion in Liberty 

Zone Tax Benefits 

Will Be Realized 

GAO-03-1102 

Highlights of GAO-03-1102, a report to the 

Honorable Charles B. Rangel, Ranking 

Minority Member, Committee on Ways 

and Means, House of Representatives, 

and the Honorable Carolyn B. Maloney, 

House of Representatives 

The President pledged a minimum 

of $20 billion in assistance to New 

York for response and recovery 

efforts after the September 11, 

2001, terrorist attacks. This 

includes tax benefits, commonly 

referred to as the Liberty Zone tax 

benefits, that the Joint Committee 

on Taxation (JCT) estimated would 

reduce federal tax revenues by 

about $5 billion. The actual 

amount of benefits realized, 

however, will depend on the extent 

to which taxpayers and the city and 

state of New York take advantage 

of them. 

GAO was asked to determine 

• 	 the extent to which the Internal 

Revenue Service (IRS) is 

collecting and reporting 

information about the number 

of taxpayers using each of the 

seven Liberty Zone tax benefits 

and the revenue loss 

associated with those benefits 

and 

• 	 if IRS is not collecting and 

reporting this information, 

what steps it would need to 

take and what resources would 

be needed to do so. 

GAO is making no 

recommendations in this report. 

The Commissioner of Internal 

Revenue was provided a draft of 

this report for his review and 

comment. The IRS Director of Tax 

Administration Coordination 

agreed with the contents of the 

report. 

www.gao.gov/cgi-bin/getrpt?GAO-03-1102. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 

September 2003 

TAX ADMINISTRATION 

Information Is Not Available to Determine 

Whether $5 Billion in Liberty Zone Tax 

Benefits Will Be Realized 

For one of the seven Liberty Zone tax benefits, the business employee credit, 

IRS is collecting but not planning to report some information about use—the 

number of taxpayers claiming the credit and the amount of credit claimed— 

nor is it planning to use this information to report the revenue loss 

associated with that benefit. IRS is not planning to collect or report 

information about the use of the other six benefits or the revenue loss 

associated with those benefits. According to IRS officials, the agency 

followed its usual procedures in determining whether to collect information 

about benefit use and revenue loss. IRS officials said they would collect and 

report these data if (1) it would help the agency administer the tax laws or 

(2) IRS was legislatively mandated to do so. 

IRS would need to make several changes if it were to collect more 

information on the use of the benefits and the associated revenue loss, and 

this information would not be complete or lead to a verifiable measure of the 

reduction in federal tax revenues due to the benefits. IRS would need to 

change forms, processing procedures, and computer programming, which 

would add to taxpayer burden and IRS’s workload. IRS officials were unable 

to estimate the costs involved in accomplishing these actions or the number 

of staff needed to do so. The officials said that the earliest they could make 

these changes would be for tax year 2004 returns. As a result, IRS would not 

have information for two of the years that the benefits were in effect, which 

is significant because most of the benefits expire by the end of 2006. In 

addition, if IRS were to collect data on the use of the Liberty Zone benefits, it 

would be able to make an estimate, but could not produce a verifiable 

measure, of the revenue loss due to the benefits because, for example, IRS 

would have to make assumptions about how taxpayers would have behaved 

in the absence of the benefits. 

New York Liberty Zone 
Contents 


Letter 1 

Results in Brief 2 

Background 3 

IRS Generally Not Planning to Collect or Report Information about 

the Use of Liberty Zone Tax Benefits or Reductions in 

Taxpayers’ Tax Liabilities 4 

Several Changes Needed If IRS Were to Collect and Report More 

Information about the Liberty Zone Tax Benefits and Estimate 

Revenue Losses 6 

Agency Comments 9 

Appendix I Objectives, Scope, and Methodology 

Appendix II Summary of the Liberty Zone Tax Benefits 

Table 

Table 1: Example of Recalculation of Taxable Income 

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Page i GAO-03-1102 Liberty Zone Tax Benefits 

11 

12 

8 
United States General Accounting Office 

Washington, DC 20548 

September 30, 2003 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 

The Honorable Carolyn B. Maloney 

House of Representatives 

The President pledged a minimum of $20 billion in assistance to New York 

for response and recovery efforts after the terrorist attacks of 

September 11, 2001. The $20 billion includes about $15 billion of 

congressionally appropriated funds, primarily administered by the 

Department of Housing and Urban Development, Department of 

Transportation, and Federal Emergency Management Agency (FEMA), for 

different types of assistance.1

 The remaining assistance came in the form 

of tax benefits, which the Joint Committee on Taxation (JCT) estimated 

would reduce federal revenues by about $5 billion. These tax benefits are 

commonly referred to as the Liberty Zone tax benefits.2

 Because of your 

interest in whether the $5 billion in tax benefits will be realized, you asked 

us to determine the extent to which the Internal Revenue Service (IRS) is 

collecting and reporting information about the number of taxpayers using 

each of the seven Liberty Zone tax benefits and the revenue loss 

associated with those benefits. In addition, if IRS is not collecting and 

reporting this information, you asked us to determine what steps it would 

need to take and what resources would be needed to do so. 

To address these objectives, we interviewed IRS and city and state of New 

York officials and analyzed information they provided, as well as JCT data, 

about the use and revenue effects of the Liberty Zone tax benefits. We also 

discussed the steps IRS would need to take to collect information on the 

1

 In March 2003, FEMA became a part of the Department of Homeland Security. Also, a 

small portion of the funds are administered by other agencies such as the Small Business 

Administration and the Department of Labor. We will report additional information about 

the total benefits provided to New York later this year. 

2

 The New York Liberty Zone is the area located on or south of Canal Street, East Broadway 

(east of its intersection with Canal Street), or Grand Street (east of its intersection with 

East Broadway) in the Borough of Manhattan in the city of New York. 

Page 1 GAO-03-1102 Liberty Zone Tax Benefits 
Results in Brief 

use and revenue effects of the benefits and the resources it would need to 

do so. For the purposes of this report, we defined use as the number of 

taxpayers who claimed each benefit and the amount each claimed. 

However, the amount that taxpayers claim on their returns is not the same 

as the reduction in tax liabilities due to using the benefits. Because some 

of the Liberty Zone tax benefits substitute for less generous deductions or 

credits to which taxpayers would otherwise be entitled, the net reduction 

in taxpayers’ tax liabilities (and net reduction in federal revenues) can 

only be determined by comparing taxpayers’ tax liabilities with the 

benefits in place to their tax liabilities when only the alternate deductions 

and credits are available.

3

 Our scope and methodology are discussed in 

greater detail in appendix I. 

For one of the seven Liberty Zone tax benefits, the business employee 

credit, IRS is collecting but not planning to report some information about 

use—the number of taxpayers claiming the credit and the amount of credit 

claimed—nor is it planning to use this information to report on the 

revenue loss associated with that benefit. IRS is not planning to collect or 

report information about the use of the other six benefits or the revenue 

loss associated with those benefits. IRS can collect information on the use 

of the business employee credit because it developed a new form to 

administer this credit. However, IRS currently cannot collect information 

on the remaining six Liberty Zone benefits because it is using existing 

forms to administer them, and taxpayers do not report these six benefits 

as separate items on their returns. According to IRS officials, the agency 

followed its usual procedures in determining whether to collect 

information about benefit use and revenue loss. IRS officials said they 

would collect and report these data if (1) it would help the agency 

administer the tax laws or (2) IRS was legislatively mandated to do so. 

IRS would need to make several changes if it were to collect more 

information on the use of the benefits and the associated revenue loss, and 

this information would not be complete or lead to a verifiable measure of 

the reduction in federal tax revenues due to the benefits. IRS would need 

to change forms, processing procedures, and computer programming, 

3

 JCT’s $5 billion estimate of the reduction in federal tax revenues is not exactly the same 

as the economic value of the benefits to taxpayers. For example, the JCT estimate, which 

covers a 10-year time frame, does not completely reflect the fact that taxpayers who claim 

the expensing deduction today would receive smaller deductions in the future than they 

otherwise could have claimed. 

Page 2 GAO-03-1102 Liberty Zone Tax Benefits 
which would add to taxpayer burden and IRS’s workload. For example, 

changing the form that taxpayers use to claim depreciation so that they 

report separately the amount of depreciation due to the special Liberty 

Zone depreciation allowance would result in increased taxpayer burden. 

IRS’s workload would also increase because, among other things, it would 

be processing additional information on depreciation. IRS officials were 

unable to estimate the costs involved in accomplishing these actions or the 

number of staff needed to do so. They said that the earliest they could 

make these changes would be for tax year 2004 returns. As a result, IRS 

would not have information for two of the years that the benefits were in 

effect, which is significant because most of the benefits expire by the end 

of 2006. In addition, if IRS were to collect data on the use of the Liberty 

Zone benefits, it would be able to make an estimate, but could not produce 

a verifiable measure, of the revenue loss due to the benefits because, for 

example, IRS would have to make assumptions about how taxpayers 

would have behaved in the absence of the benefits. 

The Commissioner of Internal Revenue was provided a draft of this report 

for his review and comment. The IRS Director of Tax Administration 

Coordination agreed with the contents of the report. 

To assist New York in recovering from the September 11, 2001, terrorist 

attacks, Congress passed Public Law 107-147, the Job Creation and 

Worker Assistance Act of 2002. The act was signed into law on March 9, 

2002, and created seven tax benefits that focus on the New York Liberty 

Zone. The Liberty Zone tax benefits include 

• 	 treating employees in the Liberty Zone as a targeted group for purposes of 

the work opportunity tax credit (WOTC), which IRS refers to as the 

business employee credit; 

• a special depreciation allowance; 

• an increase in section 179 expensing; 

• special treatment of leasehold improvement property; 

• 	 an extension of the replacement period for involuntarily converted 

property; 

• authority to issue tax-exempt private activity bonds; and 

• authority to issue advance refunding bonds. 

An explanation of each benefit, an example of how it can be used, and the 

period each benefit is in effect are included in appendix II. 

Background 

Page 3 GAO-03-1102 Liberty Zone Tax Benefits 
IRS Generally Not 

Planning to Collect or 

Report Information 

about the Use of 

Liberty Zone Tax 

Benefits or 

Reductions in 

Taxpayers’ Tax 

Liabilities 

Under the Congressional Budget Act of 1974 as amended, JCT provides 

estimates of the revenue consequences of tax legislation. In March 2002, 

JCT estimated that the New York Liberty Zone tax benefits would reduce 

federal revenues by $5.029 billion over the period 2002 through 2012.4 

For one of the seven Liberty Zone tax benefits, the business employee 

credit, IRS is collecting but not planning to report some information about 

use—the number of taxpayers claiming the credit and the amount of credit 

claimed—nor is it planning to use this information to report on how the 

benefit has reduced taxpayers’ tax liabilities. IRS is not planning to collect 

or report information about the use of the other six benefits or how using 

these benefits has reduced taxpayers’ tax liabilities. 

IRS collects information on how many taxpayers use the business 

employee credit and the amount of the credit claimed on Form 8884 (New 

York Liberty Zone Business Employee Credit). Submission processing 

officials in the Small Business/Self-Employed (SB/SE) Division began 

entering information from this form into IRS’s computer system in January 

2003. Some taxpayers claiming the business employee credit may have 

their returns processed by the Wage and Investment (W&I) Division, 

which is not planning to enter information from the form into the 

computer system. However, IRS officials said that the bulk of the 

taxpayers who would claim this credit would submit their returns to the 

SB/SE Division. 

IRS can collect information on the use of the business employee credit 

because it developed a new form to administer this credit. Although the 

business employee credit was included in the WOTC provisions, IRS 

officials said they needed to track business employee credits separately 

because the business employee credit can be used to offset any alternative 

minimum taxes owed but the general WOTC provisions cannot.5

 IRS 

currently cannot collect information on the remaining six Liberty Zone 

benefits because it is using existing forms to administer them, and 

4

 Joint Committee on Taxation, Estimated Revenue Effects of the “Job Creation and 

Worker Assistance Act of 2002” Fiscal Years 2002-2012 (Washington, D.C.: Mar. 6, 2002), 

2. 

5

 The alternative minimum tax is a separate tax computation required of some taxpayers 

whose taxable incomes exceed certain thresholds and who otherwise would owe little or 

no taxes because they are claiming certain special deductions and credits. 

Page 4 GAO-03-1102 Liberty Zone Tax Benefits 
taxpayers do not report these six benefits as separate items on their 

returns. For example, taxpayers add the amount of depreciation they are 

allowed under the Liberty Zone special depreciation allowance benefit to 

other depreciation expenses and report their total depreciation expenses 

on their returns. Since taxpayers do not report their use of six of the seven 

benefits separately on their returns, IRS cannot report on how extensively 

these six benefits were used. 

IRS officials said that although they are collecting information on the 

amount of business employee credits claimed by taxpayers, they are not 

planning on reporting information on the extent to which the benefit 

reduced taxpayers’ tax liabilities. For the other six benefits, IRS officials 

said that without information about use, they cannot collect or report on 

the extent to which the benefits reduced taxpayers’ tax liabilities.6 

According to IRS officials, the agency followed its usual procedures in 

determining the type of information to collect about the Liberty Zone tax 

benefits. They added that IRS would collect and report information that 

would help it to administer the tax laws or if it was legislatively mandated 

to collect or report information. IRS officials said they do not need 

information about the use of the Liberty Zone tax benefits or the resulting 

reductions in taxpayers’ tax liabilities in order to administer the tax laws. 

For example, IRS officials said that they do not need information on each 

specific benefit claimed to properly target their enforcement efforts. 

Instead, they target their enforcement efforts based on taxpayers claiming 

various credits, deductions, and so forth that fall outside of expected 

amounts. In addition, IRS officials noted that the agency has not been 

legislatively mandated to collect or report information on the benefits. 

6

 Bond issuers also receive economic benefits from tax-exempt bonds because they pay 

less interest than they would have had to pay on the same amount of bonds that were not 

tax exempt. IRS could use forms prepared by bond issuers to collect information about the 

two Liberty Zone bond benefits, such as the maturity date and issue prices. Information on 

the bonds issued is also available from the city and state of New York. 

Page 5 GAO-03-1102 Liberty Zone Tax Benefits 
Several Changes 

Needed If IRS Were to 

Collect and Report 

More Information 

about the Liberty 

Zone Tax Benefits and 

Estimate Revenue 

Losses 

IRS would need to make several changes if it were to collect more 

information on taxpayers’ use of the benefits and their effect on reducing 

taxpayers’ tax liabilities. IRS would need to change forms used to collect 

information from taxpayers, change how it processes information from tax 

returns, and revise computer programming, which would add to taxpayer 

burden and IRS’s workload. Even if it were to make these changes, IRS 

would not have information for two of the years the benefits were 

available. Also, although the additional information would enable IRS to 

make an estimate of the revenue loss due to the benefits, it would not be 

able to produce a verifiable measure of the loss. To produce the estimate, 

IRS would have to make assumptions about how taxpayers would have 

behaved in the absence of the benefits. 

Several Changes Needed If 

IRS Were to Report on Use 

of Benefits and Reduction 

in Taxpayers’ Tax 

Liabilities 

For six of seven of the Liberty Zone tax benefits, IRS would need to revise 

forms, tax return processing procedures, and computer programming if it 

were to collect and report information about the number of taxpayers 

claiming the benefit and the amount they claimed. It would also need to 

take most of these steps to report on the use of the seventh benefit—the 

business employee credit. According to IRS officials, they would need to 

make staff available to revise forms, review returns for completeness and 

accuracy, transcribe the additional data, and write the necessary computer 

programs for entering and extracting data. They would also need to 

allocate computer resources to process the additional information 

collected and prepare reports on the use of the benefits. For example, for 

the special depreciation allowance benefit, IRS would need to revise 

• 	 Form 4562 (Depreciation and Amortization) so that taxpayers reported the 

amount of depreciation they claimed specifically due to this benefit, 

• 	 tax return processing procedures so that processing staff reviewed Form 

4562 for completeness and accuracy and transcribed information about 

the special depreciation allowance, and 

• 	 computer programming so that information about the special depreciation 

allowance could be entered into IRS’s information systems and extracted 

in order to prepare reports about the use of the benefit. 

For the seventh benefit—the business employee credit—taxpayers already 

separately report the amount of the credit they are claiming, and IRS is 

already reviewing these forms for accuracy and completeness, 

transcribing data from them, and entering this information into the 

agency’s computer system for those returns that are processed by the 

SB/SE Division. However, computer programming would need to be 

changed to extract information to prepare reports about benefit use. For 

Page 6 GAO-03-1102 Liberty Zone Tax Benefits 
any returns processed by the W&I Division, IRS would also need to revise 

W&I processing procedures and computer programming. 

Since IRS currently does not have any plans to make these changes, 

officials were unable to estimate the costs involved in accomplishing these 

actions or the number of staff needed to do so. However, IRS officials 

estimated they added one full-time equivalent (FTE) primarily to review 

the Form 8884s for completeness and accuracy and for data 

transcription—part of the process to collect information about the use of 

the business employee credit.7 

If IRS collected information about the use of the benefits, IRS could then 

develop some information on the reduction in taxpayers’ tax liabilities due 

to the benefits. For example, IRS could determine how much lower each 

taxpayers’ tax liability is due to the use of the tax benefits, assuming that 

taxpayer behavior would be the same whether the benefits existed or not. 

Table 1 is an example of such a computation for claiming the Liberty Zone 

Section 179 expensing benefit. In this example, a taxpayer with $100,000 in 

income bought $40,000 worth of office equipment in 2002 and placed this 

equipment in service in the Liberty Zone in 2002. After applying the Liberty 

Zone section 179 expensing benefit, taxable income would be $60,000. 

Since the equipment has been completely expensed, the taxpayer cannot 

claim any further deductions for this equipment. To recalculate the 

taxpayer’s taxable income as if the special Liberty Zone expensing benefit 

did not exist, IRS could assume that the taxpayer would make the same 

investment, even without the Liberty Zone tax benefit, and still claim the 

$24,000 section 179 deduction available to all taxpayers in 2002 and any 

other available deductions, such as the special depreciation allowance. In 

our example, the special depreciation allowance would be worth $4,800, 

and the amount otherwise available as a depreciation deduction (regular 

depreciation) would be worth $1,600, which would reduce the taxpayer’s 

taxable income to $69,600. The total reduction in taxable income would be 

$9,600. 

7

 An FTE consists of one or more employees who collectively work for 1 year. For example, 

one full-time employee or two half-time employees equal one FTE. 

Page 7 GAO-03-1102 Liberty Zone Tax Benefits 
Table 1: Example of Recalculation of Taxable Income 

Taxpayer calculation of Recalculation of taxable 

taxable income with Liberty income with standard 

Zone expensing benefit deductions 

Income $100,000 Income $100,000 

Less: Less: 

Liberty Zone Section 179 (40,000) Standard Section 179 (24,000) 

Special depreciation (4,800) 

Regular depreciation (1,600) 

Taxable income $60,000 Taxable income $69,600 

Sources: IRS and GAO. 

Note: GAO analysis of IRS information. 

Once all the adjustments to taxable income were made, IRS would then 

need to apply the appropriate marginal tax rate to arrive at the taxpayer’s 

recalculated tax liability. 

IRS Could Produce 

Estimates but Not a 

Verifiable Measure of the 

Revenue Loss 

If IRS were to begin collecting information on the number of taxpayers 

using the Liberty Zone tax benefits and the amounts they claimed, the 

information would not be complete. In addition, although the information 

would enable IRS to make an estimate of the revenue loss due to the 

benefits, the information would not result in a verifiable measure of the 

loss. To produce the estimate, IRS would have to make assumptions about 

how taxpayers would have behaved in the absence of the benefits. 

IRS said the earliest it would be able to collect information on the number 

of taxpayers using the benefits and the amounts each claimed would be 

for tax year 2004 returns, which IRS would not process until calendar year 

2005. As a result, IRS would not have information for two of the years that 

the benefits were in effect, which is significant because most of the 

benefits expire by the end of 2006.8

 IRS could not reconstruct information 

on tax liability for those 2 years because returns already filed would not 

indicate whether taxpayers used the Liberty Zone benefits and would not 

show the amount claimed through benefit use. Although IRS could ask for 

information about past benefit use since taxpayers are instructed to keep 

tax records for 3 years, this would require taxpayers to provide additional 

information and increase taxpayer burden. Also, it would be difficult for 

8

 Details on the expiration dates for each benefit are given in app. II. 

Page 8 GAO-03-1102 Liberty Zone Tax Benefits 
IRS to use current year information to estimate the amount claimed 

through benefit use retroactively because the pattern of using the benefits 

could have changed over time. 

In addition to not being complete, the data that IRS could collect on the 

number of taxpayers using the Liberty Zone benefits and the amounts each 

claimed would not be sufficient for actually measuring how much revenue 

those benefits cost the federal government. The reduction in revenues due 

to the Liberty Zone tax benefits is equal to the difference between the 

amount of revenue that the federal government would collect with the 

benefits in place and the amount it would collect in the absence of those 

benefits. There are two reasons why revenues would be different with and 

without the benefits. First, the rules for computing tax liabilities are 

different in the two cases (as shown in table 1). Second, the behavior of 

many taxpayers is likely to be different in the two cases. In fact, a primary 

purpose of the tax benefits is to influence taxpayer behavior. For example, 

in the case of the Liberty Zone section 179 benefit, some taxpayers who 

claim this benefit would have made different investment decisions if that 

particular benefit were not available. In our simplified example shown in 

table 1, this difference in behavior might be that the taxpayer invested less 

than $40,000 in office equipment—perhaps even nothing—because the 

Liberty Zone benefit did not exist. As a consequence, the taxpayer’s 

taxable income would have been different than the $69,600 shown in table 

1. Given that IRS cannot know what taxpayers would have done in the 

absence of the benefits, the best it could do is estimate revenue losses 

based on assumptions about that alternative behavior. 

Agency Comments 	 The Commissioner of Internal Revenue was provided a draft of this report 

for his review and comment. The IRS Director of Tax Administration 

Coordination agreed with the contents of the report. 

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 7 days from its 

date. At that time, we will send copies to the Chairman and Ranking 

Minority Member of the Senate Committee on Finance; the Chairman of 

the House Committee on Ways and Means and the Chairman and Ranking 

Minority Member of its Subcommittee on Oversight; the Secretary of the 

Treasury; the Commissioner of Internal Revenue; the Director of the Office 

of Management and Budget; and other interested parties. We will make 

copies available to others on request. In addition, the report will be 

available at no charge on the GAO Web site at http://www.gao.gov. 

Page 9 GAO-03-1102 Liberty Zone Tax Benefits 
This report was prepared under the direction of Jonda Van Pelt, Assistant 

Director. If you have any questions regarding this report, please contact 

her at (415) 904-2186 or vanpeltj@gao.gov or me at (202) 512-9110 or 

brostekm@gao.gov. Key contributors to this report were Evan Gilman, 

Edward Nannenhorn, Lynne Schoenauer, Shellee Soliday, Anne Stevens, 

and James Wozny. 

Michael Brostek 

Director, Tax Issues 

Page 10 GAO-03-1102 Liberty Zone Tax Benefits 
Appendix I: Objectives, Scope, and 

Methodology 

Our first objective was to determine the extent to which the Internal 

Revenue Service (IRS) is collecting and reporting information about the 

use and value of the seven Liberty Zone tax benefits. We defined use as the 

number of taxpayers who claimed each benefit and the amount each 

claimed. In analyzing value, we examined what information IRS could 

provide about reductions in taxpayers’ tax liabilities when they used the 

Liberty Zone tax benefits, and then examined whether this information 

could be used to measure the actual reduction in federal tax revenues. To 

address the first objective, we interviewed IRS officials from Legal 

Counsel, the Wage and Investment (W&I) Division’s and the Small 

Business/Self-Employed (SB/SE) Division’s submission processing groups, 

Statistics of Income (SOI), Forms and Publications, and the Tax Exempt 

Government Entities (TEGE) Division to determine if they were collecting 

and reporting any information about the use of the Liberty Zone tax 

benefits and how the benefits reduced taxpayers’ tax liabilities. We 

analyzed the documents they provided about collecting and reporting on 

the use of the benefits and the reduction in taxpayers’ tax liabilities. We 

also analyzed the data the Joint Committee on Taxation (JCT) provided 

about its estimate of the reduction in federal tax revenues. Finally, we 

interviewed New York city and state officials to determine if they were 

collecting and reporting information on the benefits. 

Our second objective was to determine what steps IRS would need to take 

and the resources it would need to collect and report information on the 

use and value of the Liberty Zone tax benefits if it is not already doing so. 

We used the same definition of use and value as we used for the first 

objective. To address the second objective, we interviewed IRS officials 

from Legal Counsel, the W&I Division’s and the SB/SE Division’s 

submission processing groups, SOI, Forms and Publications, and the 

TEGE Division to determine what steps they would need to take and the 

resources they would need to collect and report information on the use of 

the Liberty Zone tax benefits and the reduction in taxpayers’ tax liabilities 

if they used the benefits. We also analyzed IRS documents related to the 

steps that would need to be taken to collect and report on the use of the 

benefits and on the reduction in taxpayers’ tax liabilities. 

We performed our work from April 2003 through August 2003 in 

accordance with generally accepted government auditing standards. 

Page 11 GAO-03-1102 Liberty Zone Tax Benefits 
Appendix II: Summary of the Liberty Zone 

Tax Benefits 

Liberty Zone 


tax benefita Benefit summary Example of the benefit Effective dates 


Business The work opportunity tax credit (WOTC) was expanded to An employee works at a Wages paid or incurred 

employee credit	 include a new targeted group for employees who perform small company located in for qualified employees 

substantially all their services for a business in the Liberty the Liberty Zone from during calendar years 

Zone or for a business that relocated from the Liberty Zone June 1, 2002, to October 31, 2002 and 2003 

elsewhere within New York City due to the physical 2002, and receives $3,000 

destruction or damage of their workplaces by the in wages a month. The 

September 11, 2001, terrorist attacks. company can claim a credit 

The New York Liberty Zone business employee credit for 40 percent of the first 


allows eligible businesses with an average of 200 or fewer $6,000 in wages paid 


employees to take a maximum credit of 40 percent of the ($2,400). 


first $6,000 in wages paid or incurred for work performed by


each qualified employee during calendar years 2002 and 


2003. Unlike the other targeted groups under WOTC, the 


credit for the new group is available for wages paid to both


new hires and existing employees. 


Special The special depreciation allowance provides an additional 

depreciation deduction for eligible properties. Eligible Liberty Zone 

allowance properties include new tangible property (e.g., new office 

equipment), used tangible property (e.g., used office 

equipment), and residential rental property (e.g., an 

apartment complex) and nonresidential real property (e.g., 

an office building) if it rehabilitates real property damaged or 

replaces real property destroyed or condemned as a result 

of the September 11, 2001, terrorist attacks. 

For property inside the Liberty Zone, the special 

depreciation allowance allows taxpayers to deduct 30 

percent of the adjusted basis of qualified property acquired 

by purchase after September 10, 2001, and placed in 

service on or before December 31, 2006 (December 31, 

2009, in the case of nonresidential real property and 

residential rental property). For property outside the Liberty 

Zone, a special depreciation allowance is available for 

taxpayers but only with regard to qualified property—such 

as new tangible property and non-Liberty Zone leasehold 

improvement property—that is acquired after 

September 10, 2001, and before September 11, 2004, and 

is placed in service on or before December 31, 2004. 

However, recent legislation (the Jobs and Growth Tax 

Relief Reconciliation Act of 2003, Pub. L. No. 108-27) has 

increased the deduction to 50 percent for qualified property 

both within and outside the Liberty Zone that is acquired 

after May 5, 2003, and placed in service on or before 

December 31, 2004. 

On December 1, 2002, a 

real estate development firm 

purchases an office building 

in the New York Liberty 

Zone that costs $10 million 

and places it in service on 

June 1, 2003. The building 

replaces real property 

damaged as a result of the 

September 11, 2001, 

terrorist attacks. Under the 

provision, the taxpayer is 

allowed an additional firstyear depreciation deduction 

of 30 percent ($3 million). 

Residential rental 

property and 

nonresidential real 

property: Acquired by 

purchase after 

September 10, 2001, 

and placed in service 

on or before 

December 31, 2009 

New and used tangible 

property: Acquired by 

purchase after 

September 10, 2001, 

and placed in service 

on or before 

December 31, 2006 

Page 12 GAO-03-1102 Liberty Zone Tax Benefits 
Appendix II: Summary of the Liberty Zone 

Tax Benefits 

Liberty Zone 


tax benefita Benefit summary Example of the benefit Effective dates 


Section 179 

expensing 

Taxpayers with a sufficiently small investment in qualified 

section 179 business property in the Liberty Zone can elect 

to deduct rather than capitalize the amount of their 

investment and are eligible for an increased amount over 

other taxpayers. For qualified Liberty Zone property placed 

in service during 2001 and 2002, under section 179 

taxpayers could deduct up to $59,000 ($24,000 under the 

general provision plus an additional $35,000) of the cost. 

The investment limit (phase-out range) in the property was 

$200,000. For qualified Liberty Zone property placed in 

service after 2002 and before 2007, taxpayers could deduct 

$60,000 ($25,000 under the general provision plus the 

additional $35,000) of the cost. 

However, recent legislation (Pub. L. No. 108-27) has further 

increased the maximum deduction for qualified Liberty Zone 

property placed in service after 2002 and before 2006 to 

$135,000 and has increased the investment limit to 

$400,000. For 2006, the maximum section 179 deduction 

allowed for qualified Liberty Zone property returns to 

$60,000 and the investment limit is $200,000. To calculate 

the available expensing treatment deduction amount for 

qualified Liberty Zone property, every dollar for which 50 

percent of the cost of the property exceeds the investment 

limit is subtracted from the maximum deduction allowed. 

Taxpayers outside of the Liberty Zone may also expense 

qualified property under section 179. However, the 

maximum deduction for non-Liberty Zone property is 

$35,000 less than the maximum deduction allowed for 

Liberty Zone property. The investment limits for Liberty 

Zone and non-Liberty Zone property are similar. However, 

in contrast, in calculating the available expensing treatment 

deduction amount for non-Liberty Zone properties, every 

dollar invested in the property that exceeds the investment 

limit is subtracted from the maximum deduction allowed. 

In 2002, a taxpayer 

purchases and places in 

service in his or her Liberty 

Zone business several 

qualified items of equipment 

costing a total of $260,000. 

Because 50 percent of the 

cost of the property 

($130,000) is less than 

$200,000, the investment 

limit, the section 179 

deduction of $59,000 is not 

reduced, and the taxpayer 

can deduct this amount. 

Effective for section 

179 property placed in 

service after 

September 10, 2001, 

and on or before 

December 31, 2006 

Page 13 GAO-03-1102 Liberty Zone Tax Benefits 
Appendix II: Summary of the Liberty Zone 

Tax Benefits 

Liberty Zone 


tax benefita Benefit summary Example of the benefit Effective dates 


Leasehold Qualified Liberty Zone leasehold improvement property can In 2004, a taxpayer buys Effective for property 

improvement be depreciated over a 5-year period using the straight-line and places in service placed in service after 

property method of depreciation. The term “qualified Liberty Zone $100,000 in additional walls September 10, 2001, 

leasehold property” means property as defined in section for a leased office building in and on or before 


168(k)(3) and may include items such as additional walls the Liberty Zone. For each December 31, 2006 


and plumbing and electrical improvements made to an tax year from 2004 through 


interior portion of a building that is nonresidential real 2008, the taxpayer can 


property. Qualified Liberty Zone leasehold improvements deduct up to one-fifth of the 


must be placed in service in a nonresidential building that is cost of the property. 


located in the Liberty Zone after September 10, 2001, and 


on or before December 31, 2006. The class life for qualified


New York Liberty Zone leasehold improvement property is 9 


years for purposes of the alternative depreciation system. 


Taxpayers can also depreciate leasehold improvements 


outside of the Liberty Zone. These taxpayers can 


depreciate an addition or improvement to leased 


nonresidential real property using the straight-line method 


of depreciation over 39 years. Qualified leasehold 


improvement properties outside the Liberty Zone can qualify 


for both the 39-year depreciation deduction and the special 


depreciation allowance. However, leasehold improvements 


inside the Liberty Zone do not qualify for the special 


depreciation allowance. 


Replacement A taxpayer may elect not to recognize gain with respect to A taxpayer held a truck for Effective for involuntary 


period for property that is involuntarily converted if the taxpayer productive use in a Liberty conversions in the 


involuntarily acquires qualified replacement property within an applicable Zone business, but it was Liberty Zone occurring 


converted period. The replacement period for property that was destroyed in the on or after 


property involuntarily converted in the Liberty Zone as a result of the September 11, 2001, September 11, 2001, 


September 11, 2001, terrorist attacks is 5 years after the 

end of the taxable year in which a gain is realized provided 

that substantially all of the use of the replacement property 

is in New York City. The involuntarily converted Liberty 

Zone property can be replaced with any tangible property 

held for productive use in a trade or business because 

taxpayers in presidentially declared disaster areas such as 

the Liberty Zone can use any tangible, productive use 

property to replace property that was involuntarily 

converted. 

Outside of the Liberty Zone, the replacement period for 

involuntarily converted property is 2 years (3 years if the 

converted property is real property held for the productive 

use in a trade or business or for investment), and the 

converted property must be replaced with replacement 

property that is similar in service or use. 

terrorist attacks. Several 

years ago, the taxpayer paid 

$50,000 for the truck and, 

over time, depreciated the 

basis in the truck to 

$30,000. If the insurance 

company paid $35,000 in 

reimbursement for the truck 

and the taxpayer used the 

$35,000 to purchase 

replacement property of any 

type that is held for 

productive use in a trade or 

business within 5 years after 

the close of the tax year of 

payment by the insurance 

company, the taxpayer 

would not recognize a gain. 

as a result of the 

terrorist attacks on that 

date 

Page 14 GAO-03-1102 Liberty Zone Tax Benefits 
Appendix II: Summary of the Liberty Zone 

Tax Benefits 

Liberty Zone 


tax benefita Benefit summary Example of the benefit Effective dates 


Private activity An aggregate of $8 billion of tax-exempt private activity The Mayor of New York City Effective for bonds 

bonds 	 bonds, called qualified New York Liberty bonds, are designates $120 million of issued after March 9, 

authorized to finance the acquisition, construction, qualified New York Liberty 2002 (the date of 

reconstruction, and renovation of certain property that is bonds to finance the enactment of the Job 

primarily located in the Liberty Zone. Qualified New York construction of an office Creation and Worker 

Liberty bonds must finance nonresidential real property, building in the Liberty Zone. Assistance Act of 

residential rental property, or public utility property and must 2002), and on or before 

also satisfy certain other requirements. The Mayor of New December 31, 2004 

York City and the Governor of New York State may each 

designate up to $4 billion in qualified New York Liberty 

bonds. 

Advance An aggregate of $9 billion of advance refunding bonds may The Governor of New York Effective for advance 

refunding bonds	 be issued to pay principal, interest, or redemption price on State designates $70 million refunding bonds issued 

certain prior issues of bonds issued for facilities located in of advance refunding bonds after March 9, 2002, 

New York City (and certain water facilities located outside of to refinance bonds that and on or before 

New York City). Under this benefit, certain qualified bonds, financed the construction of December 31, 2004 

which were outstanding on September 11, 2001, and had hospital facilities in New 

exhausted existing advance refunding authority before York City. 

September 12, 2001, are eligible for one additional advance 

refunding. The Mayor of New York City and the Governor of 

New York State may each designate up to $4.5 billion in 

advance refunding bonds. 

Sources: Public Law 107-147, IRS, and GAO. 

a

The Liberty Zone tax benefits were enacted as part of the Job Creation and Worker Assistance Act of 

2002, Pub. L. No. 107-147. 

(450201) Page 15 GAO-03-1102 Liberty Zone Tax Benefits 
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