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#MeToo Gets a Victory: Confidential Settlements Will No Longer be Tax Deductible
Sexual harassment continues to be in the news. As we wrote recently, sexual misconduct in Hollywood and in the media has been a huge continuing story. It seems like new allegations are made every day. Indeed, it is argued that some actors were recently “snubbed” by the Oscar voters because of sex abuse allegations. See here.
As we wrote, women have started and continued the “#MeToo” movement on Twitter and other social media platforms. The #MeToo movement achieved a significant victory in the new tax law — the so-called Tax Cuts and Jobs Tax Act — passed in December of 2017. The new tax law includes a provision that will prevent San Diego and California business from deducting, as business expenses, any settlement moneys or attorneys’ fees for a sexual harassment case that is covered by a nondisclosure agreement. Here is what you need to know.
San Diego Businesses: Tax Deduction Revoked for Confidential Settlements
The tax law adds the following new § 162(q) to the Internal Revenue Code that states:
“(q) PAYMENTS RELATED TO SEXUAL HARASSMENT AND SEXUAL ABUSE.—No deduction shall be allowed under this chapter for—
(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or
(2) attorney’s fees related to such a settlement or payment.”
This provision has already gone into effect. The obvious intent here is to provide a disincentive to have sexual harassment and sexual abuse cases clothed in the secrecy of nondisclosure and confidentiality agreements. In general, a nondisclosure agreement is a contract that prohibits the parties from disclosing the nature of the underlying case, the details of the allegations, and the details of the settlement. Harvey Weinstein famously settled many sexual harassment cases and, in each case, the women affected were required to sign nondisclosure and confidentiality agreements. Such agreements prevent victims of sexual harassment/abuse from coming forward to corroborate the stories of other victims. So, in this sense, the #MeToo movement has achieved a big “win.” Unfortunately, nothing has changed for victims who are already bound by nondisclosure agreements.
San Diego Businesses: Some Legal Questions with Respect to § 162(q)
On its face, IRS § 162(q) is unclear. Subsection (2) of the provision does not contain the language related to nondisclosure agreements. Thus, there is some possibility that the Internal Revenue Service will deny deductions for attorneys’ fees related to sexual harassment/abuse cases regardless of whether a nondisclosure agreement is signed. Congress may need to clarify the provision.
Furthermore, it is unclear how the IRS might view a case with multiple claims, such as sexual harassment coupled with a race and discrimination claim. Section 162(q) is broad, so a partial nondisclosure might still lead to full non-deductibility
Relevant to recent California legislation, does § 162(q) apply to gender identity and sexual orientation discrimination?
San Diego Businesses: Update Your Sexual Harassment Policies
We here at San Diego Corporate Law have encouraged all employers to undertake a review of company sexual harassment policies. Section 162(q) only highlights the need since now settling harassment/abuse claims is going to be even more difficult. New anti-harassment policies are in order. It is probably wise to initiate a new round of anti-harassment training for your employees.
Contact San Diego Corporate Law Today
If you would like more information about updating your company’s anti-harassment policies, or if it is time to revise your employee handbook, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email.
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