I recently wrote about efforts in NJ to limit non-disclosure agreements in sexual harassment settlements.  With the recent sweeping tax code changes signed into law in late 2017, the deductibility of sexual harassment settlements with non-disclosure clauses is now under question.

Section 13307 was inserted by Congress in response to the #MeToo movement/backlash from the Weinsteins of the world.  It’s short (with my emphasis):

(a) Denial Of Deduction.—Section 162 is amended by redesignating subsection (q) as subsection (r) and by inserting after subsection (p) the following new subsection:

“(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.”.

(b) Effective Date.—The amendments made by this section shall apply to amounts paid or incurred after the date of the enactment of this Act.

Normally, lawsuit settlements are considered ordinary business expenses and thus deductible.  Section 13307 changes that, but at the same time it raises many questions:

  • What if the settlement covers many claims (i.e. a race or religious discrimination claim — or even an unrelated non-discrimination claim — in addition to the sexual harassment claim)?  Does this clause apply?  I know most parties would structure the settlement to cover the deductible claims (more money available to the recipient) and drop the non-deductible claims.
  • Does this still apply if the underlying facts of the claim are false, but a party just wants to settle the case to get rid of it?
  • Which portion of the attorney fees would be “related?”  Just settlement costs?  Investigation costs?  Appearance costs?
  • What is the victim wants a confidentiality clause?  Does that count under this?  Or is the victim now “outed” and potentially victimized twice?

This may be well intentioned, but like many items in the tax bill, it seems rushed and not well thought through.  Time will tell.