No tax deduction for sexual harassment settlements with nondisclosure agreements


Don't never say Congress ain't never did nothin' about sexual harassment!

The new tax law enacted in December 2017 disallows a tax deduction for payments or settlements (including attorney fees) related to sexual harassment or sexual abuse if the payments or settlements are subject to a nondisclosure agreement. The effective date is December 23, 2017.

Right here in the new tax law is a provision (Section 162(q)) that says:

"(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."

Here is a series of questions folks are asking:

What is "sexual harassment or sexual abuse"? [The statute has no definition. Use some common sense here. Don't pretend you don't know what this means.]

What exactly does "related to" mean? [Again, no definition.]

To what extent can a settlement be structured so payments are allocated to other claims that the plaintiff made? [It's a time-honored rule that IRS will look under the settlement to the underlying claim – the "origin of the claim" doctrine.]

Will this new provision apply when a perpetrator is fired and given a severance payment? [Plain text suggests "Yes," although the drafters probably weren't thinking about this.]

Does the new provision apply to a plaintiff's attorney fees? [I think not, because Section 168 deals with ordinary and necessary expenses "in carrying on any trade or business."]

Does the new provision apply whether it's the plaintiff or defendant or both that wants the nondisclosure agreement? [Plain text makes no distinction.]

Will the results be fewer nondisclosure agreements? Smaller settlement amounts? Larger settlement amounts? [Probably all three.]

Will the new provision apply to pre-existing agreements if the payments occur after the effective date? [Plain text - which mentions both payments and settlements - suggests the answer is "Yes."]

Will the new provision apply when the release-and-confidentiality agreement covers Title VII sex discrimination even when an employee never made such a claim? [That seems like a stretch. It's not really "related to" sexual harassment or abuse.]