U.S. Senator Chuck Schumer (D-N.Y.) is calling on the U.S. Department of Agriculture to say grants made for conserving soil and water resources, like the Suffolk Septic Improvement Program in Suffolk, cannot be counted as taxable income. Credit: Newsday/James Carbone

Senate Majority Leader Chuck Schumer said Monday he will seek reversal of a 2020 Internal Revenue Service ruling that levied tax hikes in the thousands on Suffolk homeowners who received grants to replace aging septic systems.

The grant program was launched in 2017 by the county and is ongoing. It's part of an effort to encourage Long Island homeowners to upgrade their septic systems to reduce nitrogen pollution in groundwater and local waterways. The IRS has ruled the grants should be considered taxable income, even though homeowners do not derive a financial benefit from the upgrade and Suffolk pays the grants directly to contractors.

During a news conference Monday in East Islip, Schumer (D-N.Y.) announced a potential workaround to the "illogical" IRS decision. If the USDA determines the program is a benefit to the environment, the grants would be excluded from taxable income, he said.

"These are middle class people. They work hard. They can't afford [the tax hike]," he said. "It's not fair. It's not right."

The USDA did not immediately respond Monday to requests for comment and it remained unclear if the department would comply with Schumer's request. Separate legislation, Suffolk officials said, would be needed to pay homeowners back retroactively for the tax hike.

Louis Castronova of East Islip said he received a grant to update his septic system in 2020 after his cesspool collapsed. The improvement, he said, cost him more than $4,000 in tax hikes.

“You sit there and say, ‘wow, that could have been used for my child's education,’ ” said Castronova, an Islip Town building inspector.

The IRS, in its 2020 ruling, said the money counted as income because homeowners exercised "management or oversight functions of the payment," including by choosing the contractor used, and the grants were not given solely based on need.

The IRS did not respond to requests for comment Monday.

In a letter Monday to USDA Secretary Tom Vilsack, Schumer said IRS code stipulates that payments made under conservation programs, and determined by the USDA to be primarily for conserving soil and water resources and protecting the environment, can be excluded from a recipient's gross income.

Suffolk has 360,000 aging cesspools and septics, environmental advocates said. To date, more than 1,000 septic systems have been installed through the Suffolk program, and roughly 3,200 homeowners have applied for grants of between $10,000 and $20,000, officials said.

"This program was specifically crafted to help working class Long Islanders," said Adrienne Esposito, executive director of Citizens Campaign for the Environment. "It was intended to be good for our wallets, good for the environment and good for the sustainability of our island."

Suffolk County Executive Steve Bellone said the program "is absolutely critical to our plan in Suffolk County over the coming decades to once and for all solve the water quality problem."

Bellone, noting that county homeowners have been seeing hikes to their tax bills since 2020, said that if the IRS does not reverse course. the program could stall.

"This is the biggest issue of our time here," he said. "If we don't preserve, protect and rollback the impacts on water quality here; if we're not protecting that water quality, we're not going to have a prosperous future on Long Island."

Rep. Tom Suozzi (D-Glen Cove) and Sen. Kirsten Gillibrand (D-N.Y.) last year pushed for legislation to undo the IRS ruling. But the change, included in President Joe Biden's Build Back Better bill, died in the Senate.

Correction: The program offering grants to homeowners to replace aging septic systems was started by Suffolk County. Due to an editing error, this information was incorrect in an earlier verison of this story.

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