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Tax on Suffolk County septic grant seen as ‘deterrent’ to program

03/20/2019 5:08 AM |

In September 2017, politicians and members of the media converged on the backyard of a Flanders resident who was the first recipient of a Suffolk County grant to replace an old failing cesspool with a new state-of-the-art system.

The county’s Septic Improvement Program awards grants of up to $11,000 to offset the expense of installing advanced new wastewater treatment systems to replace older cesspools and dramatically improve the quality of groundwater.

Fast-forward to January of this year, and recipients of those grants are angry because they have been informed by County Comptroller John Kennedy’s office that they must pay federal taxes on the value of the grant money. Supporters of the new septic systems say taxing grant recipients could put the brakes on the county’s efforts to promote installation of the systems.

“The way the Suffolk County grant was set up, no funds were supposed to come to the homeowner,” said Dorothy Minnick of Flanders, who has one of the systems but was not the first recipient. “They were to go right to the installer.”

Ms. Minnick received a $10,000 county grant plus a $15,000 Southampton Town rebate — and she has been told that both are taxable as income. Others who have received the county grants have made similar complaints.

Ms. Minnick expects  her tax bill will increase by “many thousands of dollars on top of what I anticipated paying” because the septic improvements are being taxed. By treating the grant and the rebate as income, it pushed her into a higher tax bracket, she said.

She feels the county is in breach of contract by taxing the owners of the new septic systems.

The controversy erupted in January, when Mr. Kennedy’s office mailed IRS 1099 forms to grant recipients, indicating they were responsible for paying taxes on the grants. This has prompted a sharp debate between Mr. Kennedy, a Republican, and Democratic County Executive Steve Bellone, who will face off in the race for  county executive this fall.  Mr. Bellone is a strong supporter of the new systems as a means of countering nitrogen contamination.

Mr. Kennedy said his chief deputy, Louis Necroto, wrote  to deputy county executive Peter Scully more than 11 months ago suggesting that the county seek an opinion from the IRS on the issue of whether homeowners or installers should pay tax on the grant amount. He said the county executive’s office ignored the advice.

“I’m the one that’s charged under the IRS code with the obligation to do the 1099 notifications,” Mr. Kennedy said in an interview.

He said he is now seeking an opinion from the IRS as to who should pay federal taxes on the grant allotments.

The county, on the other hand, said the suggestion was discussed with tax professionals at the time and the county was advised that it was unnecessary, since the practice of sending 1099s to contractors was well established in other programs.

Mr. Scully says the county has a legal opinion from the its tax counsel advising that the 1099 forms should go to companies that actually receive the funds, not to the homeowners. The county says Mr. Kennedy ignored that opinion.

“The program was carefully designed to make the grant process easy and affordable,” Mr. Scully wrote in a letter to Mr. Kennedy. “One important aspect of that effort was structuring the program to ensure that homeowners never receive disbursement of funds. Instead, grant funds are disbursed to companies which install nitrogen-reducing septic systems, so that the IRS reporting requirements should be met through the issuance of 1099 forms.”

Mr. Scully said Mr. Kennedy also issued 1099 forms for 2017 to both installers and homeowners for the same system installations.

Mr. Kennedy confirmed this.

Asked who should pay if both the property owner and the installer received 1099 forms, Mr. Kennedy said, “I am not the IRS. It’s not for me to determine.”

But, he said, “it’s indisputable that property has been improved to the tune of $30,000 to $50,000, with the lion’s share from public funds.”

Mr. Scully said Tuesday that “this amounts to double reporting that violates basic accounting standards, since the IRS has been advised that two separate entities have received the grant, which is not true.”

Mr. Kennedy said Friday that he is now seeking a ruling from the IRS as to who should pay the tax on the grants. Mr. Scully said getting an opinion from the IRS could take a year and cost the county about $30,000 .

Tim Sheehan of Shelter Island, who received a 1099 form for his new septic system grant, said responsibility for taxes will deter people from applying for grants to install the new systems.

“The whole reason that the program was structured the way it is was to make it an incentive for people to install these systems and get as many in the ground as possible,” Mr. Sheehan said.

He says his federal taxes will probably increase by $3,000 as a result of the comptroller’s decision to send a 1099 form to grant recipients.

“From what I’ve heard, it can take 18 months to get a ruling from the IRS, plus the government is backlogged by 14 months due to the shutdown. This program could be totally shot by the time there’s actually an IRS opinion,” Mr. Sheehan said. “It’s pretty obvious to me that this is a politically motivated thing. It appears to be a way to taint one of the programs the county executive was on the forefront of establishing.”

Mr. Kennedy said it’s not politically motivated, since he started it more than 11 months ago, when he was planning his re-election campaign for comptroller. He said he has asked U.S. Senator Chuck Schumer to waive the $25,000 application fee the IRS charges for opinions and to expedite the review and reply.

The Septic Improvement Program completed eight installations in 2017, 49 in 2018 and has done 12 thus far in 2019, according to Mr. Bellone’s office. Locally, there have been 20 in Southampton Town, three each in Riverhead and Southold towns and four in Shelter Island.

The average total cost of a project is $20,523.

Mr. Bellone’s communications director, Jason Elan, said in a release that the comptroller’s move could jeopardize Gov. Andrew Cuomo’s $10 million award to fund Suffolk County’s Drinking Water Program.

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Photo caption: A photo from when the first state-of-the-art septic system was installed in 2017. (File photo)

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