Suffolk County Executive Steve Bellone at a news conference on...

Suffolk County Executive Steve Bellone at a news conference on Monday April 18, 2022 in East Islip where he demanded that the IRS reverse its ruling that county grants for high-tech septic systems constitute taxable income. Credit: Newsday/Alejandra Villa Loarca

Suffolk County Executive Steve Bellone and other officials called on the Internal Revenue Service Monday to stop taxing homeowners for county grants to upgrade their septic systems, saying the requirement hinders a key environmental program.

Bellone, joined by environmentalists and county officials from both sides of the aisle on the day tax returns were due, urged the IRS to reverse a 2020 ruling that made the county grants count as taxable income, even though homeowners never receive grant money directly.

The county pays the grant money directly to contractors to install high-tech, low-nitrogen septic systems to replace aging systems and cesspools.

Those companies are responsible to pay taxes on that funding as income, county officials said.

Yet the IRS also considers the grant funding as taxable income for homeowners, boosting their tax bills, Bellone said Monday.

"What these homeowners are facing here today is simply double taxation, and it should not be happening," Bellone said at a news conference in East Islip.

In a copy of the 2020 ruling obtained by Newsday, the IRS said the money counts as income because homeowners exercise "management or oversight functions of the payment," including by choosing the contractor used, and the grants are not given solely based on need.

An IRS spokesman declined to comment Monday, citing federal law prohibiting the agency from discussing specific taxpayers' situations.

The grant program, launched in 2017, was part of an effort to encourage homeowners to upgrade their septic systems to reduce nitrogen pollution in groundwater and local waterways.

More than 1,000 septic systems have been installed through the program, and more than 3,200 homeowners have applied for grants of between $10,000 and 20,000, county officials said.

Bellone's office said the program deliberately paid contractors directly so that homeowners would not face any additional tax burdens.

County and federal officials have continued to press the IRS to reverse its ruling.

Suffolk officials asked the IRS in October 2020 to reconsider its decision.

The agency declined to rule on the county's request and closed the county's case, according to a copy of an IRS letter county officials provided to Newsday.

Rep. Tom Suozzi (D-Glen Cove) and Sen. Kirsten Gillibrand (D-NY) last year pushed for legislation to undo the IRS ruling.

The measure, part of President Joe Biden's Build Back Better bill, passed the House of Representatives but has not gotten a vote in the Senate, Suozzi spokesman Dylan Smith said.

Louis and Brittany Castronova, East Islip homeowners who upgraded their cesspool in 2020 using county grants, said at the news conference at their home Monday they could have used what they paid in grant taxes to add home solar panels and save for their children's college funds.

"We're here to make the world a better tomorrow. And when you get affected by this, it's kind of upsetting," said Louis Castronova, an Islip Town building inspector.

The couple said they did not know how much they paid in taxes on the grant income.

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