Septic Tax-Form Fight Rages On

Legislators consider legal action over comptroller's decision to send 1099s to homeowners who received county grant

The Suffolk County Ways and Means Committee will hold a public meeting today to discuss possible legal action and other measures that can be taken against County Comptroller John M. Kennedy Jr. for his highly controversial decision to send 1099 tax forms to homeowners who were told they would not be taxed for taking advantage of a county grant program to install new, environmentally friendly septic systems, Legislator Bridget Fleming, the committee’s chairwoman said yesterday.

On Tuesday, the East End Supervisors and Mayors Association convened a special meeting on Mr. Kennedy’s 1099 decision as well, and joined Ms. Fleming and a chorus of citizens groups, officials from the county executive’s office, tax specialists, and environmental organizations who have criticized Mr. Kennedy’s decision as incorrect, and urged him to rescind the 1099s to homeowners before the April 15 deadline to file state and federal tax returns. 

Homeowners are upset because it could expose them to thousands of dollars in additional taxes though the grant money went directly to the contractors who designed and installed the systems. The contractors the county has polled have also said they and their tax preparers believe Mr. Kennedy’s ruling is in error, so they are ignoring Mr. Kennedy’s failure to send them 1099s and reporting the grant money as taxable income on their returns anyway — meaning, in practical terms, both the homeowners and contractors are paying taxes on the same grant. That should not happen, those familiar with the program and prevailing tax law say. “It doesn’t even make sense to me,” Leonard J. Marchese, a certified public accountant and comptroller for the Town of Southampton, has said, calling it a case of double taxation.

“I’m talking to counsel and outside agencies now and trying to decide, trying to work with our lawyers, to see what options might be available to protect taxpayers and this vital program from the comptroller’s highly unusual decision,” said Ms. Fleming, who attended the supervisors and mayors meeting called by Jay Schneiderman, the Southampton Town supervisor. It also included representatives from Shelter Island and the offices of the East Hampton Town supervisor and Assemblyman Fred W. Thiele Jr., among others.

“The impacts on the program and the taxpayers are alarming,” Ms. Fleming said.

The county executive’s office said last week that dozens of potential participants in the program have withdrawn since Mr. Kennedy announced he would be sending the 1099s to them, not the contractors. The two-and-a-half-year-old grant program is considered important because it incentivizes people to install nitrogen-reducing waste systems to help protect water from chemicals that lead to algae blooms and other problems. Many East End homeowners currently rely on private, often aging-out septic systems that can harm the water table.

Ms. Fleming has a special acquaintance with the septic system program because she was on the work committee that helped design the legislation, and her Ways and Means Committee has oversight over the comptroller’s department of audit and controls. 

Last week, Ms. Fleming and the committee wrote to Mr. Kennedy asking him to explain the accounting and legal principles he relied upon to make his 1099 decision, since it directly conflicts with the way the program was constructed on the tax advice of the county’s outside counsel, Harris Beach.

In his response, which arrived Tuesday afternoon, Ms. Fleming said, Mr. Kennedy continued to say that he will not bow to pressure and rescind the 1099s unless he is directed to do so by the Internal Revenue Service.

Ms. Fleming said the Town of Southampton and other grant programs that Suffolk County studied had already been told directly by the I.R.S. that whoever gets the money directly should get the 1099.

“The 1099 follows the money. . . . It’s very straightforward,” Ms. Fleming said.

Nonetheless, Mr. Kennedy has ignored the tax advice the county received and built into the program, even though he acknowledges that while he is charged to protect the fiscal health of the county, it is not his job to set policy. 

When asked if Mr. Kennedy has overstepped his non-policy role, Ms. Fleming said, “Yes, I think this is a policy decision because it’s going outside the normal legal practices, and it’s going outside normal accounting practices. So, yes, I think it’s fair to say it’s a policy decision that goes beyond the scope of the comptroller’s responsibilities. . . . The steps he has taken are highly unusual, even unprecedented for a county program.”

Ms. Fleming said it was her hope that “requiring an articulation of the basis for Mr. Kennedy’s decision would . . . clarify for the comptroller and everyone involved how unusual his step is, and, as a reasonable person, he might see clear to rescinding those 1099s. Because April 15 is a short time away.”

“So while I’m pleased he responded, his response was, unfortunately, unsatisfactory.” 

Today’s Ways and Means Committee meeting will be streamed live on Ms. Fleming’s Facebook page beginning at 12:25 p.m. 

On April 15, the Town of Southampton, in conjunction with Suffolk County, the Group for the East End, and Concerned Citizens of Montauk, will host an informational session at Southampton Town Hall, beginning at 6 p.m., on the septic system financing programs and installation. In addition to county officials, septic system vendors will attend to help answer questions.

A similar session will be held at East Hampton Town Hall on April 30 at 6 p.m.