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May 20, 2019 10:45 AMPublication: The East Hampton Press & The Southampton Press

Kennedy Defends Septic 1099, But Says He Would Help Amend Returns

May 20, 2019 11:01 AM

Suffolk County Comptroller John M. Kennedy fended off a withering barrage of questions and criticisms from county legislators last week over his decision to issue 1099 income tax forms to homeowners who got county septic upgrade grants, and said that if the IRS determines the grants shouldn’t be counted as income he would muster an accounting team to help homeowners file amended returns.

The comptroller stood by his claim that until the IRS issues a definitive ruling as to whether the county septic grants should be considered taxable income, he was required to issue the 1099s. He said he found assurances from the Suffolk County attorney’s office and an independent legal firm “unsatisfactory” but acknowledged that he did not seek input from the IRS until the issue exploded amid complaints from homeowners who received the grants and then got the unexpected tax bill.

Legislators on the Suffolk County Legislature’s Ways and Means Committee, led by Legislator Bridget Fleming of Noyac, said that the 59 county residents who were “trying to do the right thing” and got the grants to help them pay to replace their home septic systems paid as much as $2,500 in additional taxes last month because the comptroller issued them 1099s even though the county program had been designed to avoid the need for homeowners to pay taxes on the grants.

Mr. Kennedy said that he hopes the IRS will come down on the side of the grants being nontaxable, and would work to remedy any overpayment of taxes.

“I hope that we get a private letter ruling … that says they don’t have a tax consequence,” Mr. Kennedy says of the so-called private letter ruling specific to the county grant program that he has requested from the IRS. “And if I have to, I would try to hustle up some pro-bono accountants to assist with the filing of amended returns.”

He noted that a taxpayer has up to three years to refile a given year’s taxes. He said that the IRS ruling—which his office paid a $30,000 fee to request—could take several months to receive but that he was confident that it would come before the same question about income reporting has to be asked for the 2020 tax year.

Legislators wondered why Mr. Kennedy had not appealed to the IRS in early 2018, when he first raised questions to Suffolk County Executive Steve Bellone’s office about the taxability of the grants in the septic upgrade program. He acknowledged that he told the executive’s office that it should seek an opinion from the IRS, but did not seek the opinion himself. The executive’s office turned to the law firm Harris Beach, which issued a ruling saying the grants should not be considered taxable, based on findings in other similarly arranged municipal aid programs.

“But it’s your office that issues the 1099s—don’t you feel obligated as an elected official to ensure that you’re acting correctly?” Ms. Fleming asked the comptroller. “You have to rely on the folks you call the proponents, when there is this clear antagonism. Is that the way you approach your job, to shift the responsibility for this important decision to the county executive?”

In 2017 Suffolk County began offering grants of up to $11,000 to homeowners who agreed to remove aging septic systems from their homes and install new ones that are designed to filter nitrogen from human waste before releasing water from toilets into the ground. Southampton and East Hampton towns have followed suit with grants of up to $16,000 for the new systems, which can cost upward of $25,000 to install. The county, with an influx of grant money from New York State, now offers homeowners up to $30,000 to offset the cost of a new system.

The county and Southampton Town tailored their grant programs so that the funding was not given directly to the homeowner, but paid to the contractors who installed the systems, so the homeowner would not have to log the grant funds as income.

“When we passed this program, we very much vetted every single cost that could be associated with it,” Legislator Robert Calarco said. “Did you seek guidance from any legal counsel as to whether or not 1099s were appropriate or not or was that an internal decision?”

Mr. Kennedy said he was always uncomfortable with the position that the arrangement of the grants freed homeowners from counting the assistance as income, but did not seek legal advice and that issuing the 1099s was simply a matter of better-safe-than-sorry due diligence.

Critics have said Mr. Kennedy’s stance on the tax issue is motivated by his political aspirations to unseat Mr. Bellone in next fall’s county elections and was seeking to hamstring what has been a marquee initiative for Mr. Bellone this term.

Regardless of the motivations, proponents say the tax issue has dampened interest in the septic replacement program, with some homeowners withdrawing from the program and others putting their plans to replace their septics on hold while the matter is settled.

“We know there is harm to taxpayers, we know there’s harm to the program, we know that if there’s harm to the program there’s harm to the environment that the program was carefully designed to protect and rehabilitate,” Ms. Fleming said. “So we know that the issuing of these 1099s caused significant harm on many levels and yet you issue it even though you know that you have opinion that clearly states you do not have to do that.”

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