Some Septic Grants Were ‘Double-Taxed’

A bipartisan group of county legislators has joined the Suffolk County executive’s office in turning up the heat on County Comptroller John M. Kennedy Jr. for his unilateral decision to send 1099 tax forms to homeowners who participated in an innovative septic-system upgrade program designed to help protect the area’s water supply. The officials asked Mr. Kennedy to respond immediately to their requests that he rescind the homeowners’ 1099s, or explain why he still refuses.

The homeowners are upset because they could be facing thousands of dollars in taxes they did not expect for participating in the county’s septic improvement program as a result of Mr. Kennedy’s decision. The grant applicants were told since the program began in 2017 that only the contractors who did the site designs and installations of their new systems would be required to count the grant payments as taxable income since the county paid the money directly to them.

Mr. Kennedy’s office instead issued the homeowners the 1099s, or in some cases issued 1099s for the same job to both the homeowner and contractors, because, he has said, he disagrees with the tax advice and case law the county used.

On Tuesday, Deputy County Executive Peter A. Scully, who sent his second letter in 12 days to Mr. Kennedy, wrote in an email exchange with The Star that it is “infuriating” and “ridiculous on its face” that Mr. Kennedy is blaming anyone other than himself for confusion about the program.

Mr. Scully lamented that the comptroller “has not responded to or even acknowledged my letter of March 14” and he said he informed Mr. Kennedy Tuesday of “new developments” in the matter.

“This morning, I sent a follow-up letter making him aware that some of the grants have already been double-taxed,” Mr. Scully said. “The [county’s] Department of Health Services has confirmed with the installers and design professionals who receive disbursements of funding under the program as a general rule, all report those disbursements as income and have and continue to pay incomes taxes on the grants. D.H.S. has also confirmed that some of the homeowners who received 1099s from the comptroller have also declared the grants as income and will also be paying income taxes on the same grants.”

Mr. Scully, noting that dozens have dropped out of the water quality improvement program since learning of Mr. Kennedy’s attempt to dock them for the grants, said, “Why any elected official would insist these homeowners should be taxed is mind-boggling.” 

Mr. Scully’s follow-up came five days after four legislators who are members of the county’s ways and means committee — the chairwoman, Bridget Fleming, vice chairman, William Spencer, and Robert Calaraco and Rudy Sunderman — wrote to Mr. Kennedy seeking an immediate explanation.

In a letter dated last Thursday, they cited Mr. Kennedy’s “unprecedented” decision to double-tax participants in a county-run program, and asked that Mr. Kennedy describe the legal basis and accounting principles behind his decision to issue the 1099s, as well as identify who advised him to make his decision.

The legislators wrote that they, too, are concerned that Mr. Kennedy could damage or destroy participation in the septic improvement program, the first of its kind in the state, as a result of his actions. The nitrogen-reducing septic systems that the grants help pay for can cost up to $30,000, but they help to reduce the spread of algae blooms and other contaminants in the water supply. 

“The Legislature revised the sanitary code for the first time in over 30 years for the purpose of addressing a crisis in water quality affecting the economy, the public health, and quality of life in Suffolk County,” the legislators told Mr. Kennedy. “Our concern stems not only from a very significant impact to individual Suffolk County taxpayers, but also because of the potential to impact an important county program, which has been authorized by the Legislature, and which is supported by over $10 million in funding from New York State.”

The county says there are 360,000 homes in Suffolk that have their own septic systems, and many of those are outdated.

Mr. Kennedy did not respond to repeated requests for comment this week.

But he did acknowledge in a phone interview two weeks ago that his 1099 decision is counter to the ruling the county attorney’s office made on the septic system program after soliciting tax advice from its outside counsel, Harris Beach. 

Mr. Kennedy also acknowledged that while his job is to act as the chief fiscal officer of the county — not set policy — he nonetheless refused to adhere to the county attorney’s ruling that contractors should get the 1099s for the grants because, “In my opinion, their opinion is flawed.”

Local environmental groups have joined the county legislators, homeowners, and tax professionals in decrying Mr. Kenney’s actions.

Numerous critics have charged that Mr. Kennedy, a Republican who has announced he is running against Democratic County Executive Steve Bellone in the next election, is politicizing the issue for his benefit.

“That’s obviously the motivation,” said Tim Sheehan, a Shelter Island homeowner who was surprised to receive a 1099 for the system he and his wife had installed, and pursued the matter for weeks with various county officials until Mr. Kennedy called him directly. “He repeatedly shifted the blame to the ‘current administration’ for mishandling the issue. Also, when I asked him the reason he chose to do an about-face and issue the 1099s to the homeowners, he responded that, ‘The homeowners were the only ones who benefited.’ ”

“Apparently water quality doesn’t apply to the greater good,” Mr. Sheehan added.

Mr. Kennedy has said that he informed the county executive’s office last year that he had concerns about the program and would like to seek a private letter ruling from the Internal Revenue Service. But Mr. Scully insisted Tuesday that Mr. Kennedy never told the county executive’s office he would unilaterally decide who would get the 1099s.

Mr. Scully explained that the county executive office’s decided against Mr. Kennedy’s I.R.S. request, which could cost close to $30,000 and take a year or more, because there “was no need” since the county’s own attorney as well as other municipalities whose programs it studied had made the same determination. The four county legislators said they relied on the same logic while approving the program.

“The State of Maryland and the Catskill [N.Y.] Watershed Corporation have both implemented very similar programs, as have towns within Suffolk County,” the legislators wrote to Mr. Kennedy. “Under all these similar programs, 1099s are issued to the contractors who receive the grant money, not the homeowners.”

The county officials have asked Mr. Kennedy to respond about rescinding the 1099s as soon as possible, noting the April 15 deadline to file federal and state tax returns is looming.