The “Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for the fiscal year 2018” a.k.a. the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) will, among other things, likely make negotiations in connection with sexual harassment or sexual abuse claims more difficult, and settlements for such claims more expensive for employers.
Payment of a judgment or settlement of a suit or claim arising out of a business matter is generally deductible by an employer as an ordinary and necessary business expense under Internal Revenue Code Section 162 (“Section 162”). In recognition of the #MeToo movement, Democratic Senator Bob Menendez of New Jersey offered an amendment to the Senate Finance Committee version of the proposed tax bill last December, stating that “[c]orporations should not be allowed to write-off workplace sexual misconduct as a normal cost of doing business when it is far from normal.”
Dubbed the “Harvey Weinstein Tax,” new Internal Revenue Code Section 162(q) (“Section 162(q)”) provides (emphasis added):
“(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.”
Section 162(q) is effective with respect to payments made after December 22, 2017 (including all settlements that were negotiated before, but paid after, that date). Unfortunately, the Conference Report accompanying the Tax Act provides little guidance for employers, and Section 162(q) is very broadly drafted, leaving many unanswered questions. For example: (i) does the reference to “this chapter” signal the intention to eliminate the deduction for legal fees paid by an employee and/or an employer on behalf of an employee?; (ii) what is the scope of the term “payments,” – does it include payments in connection with investigation of an employee’s claims?; (iii) when is a settlement or payment considered “related to” sexual harassment or sexual abuse?; (iv) how is the deduction affected if multiple claims (i.e., harassment/abuse as well as discrimination and/or retaliation claims) are asserted and settled?; (v) as some commentators have suggested, does Section 162(q) deny a tax deduction for legal fees related to sexual harassment or abuse, even without a nondisclosure agreement?; (vi) how is Section 162(q) implicated where an employer’s insurance carrier makes these payments?; and (vii) what constitutes “sexual harassment” or “sexual abuse” for purposes of Section 162(q)?
Although we anticipate issuance of further guidance from the Internal Revenue Service and/or technical corrections by Congress, employers may want to consider (i) whether it is possible to renegotiate any unpaid settlements for claims incurred prior to December 22, 2017, (ii) how to structure settlements to maximize deductibility in the future, and (iii) whether to review and revise their form employment, severance, and confidentiality agreements (including any general releases) containing boilerplate language releasing all employment-related claims, including sexual harassment claims.
Stay tuned for further updates on Section 162(q), we will provide additional information as it becomes available.
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