Taking note of the #MeToo movement, Congress included a new provision in the tax code overhaul bill — Section 13307 – which is titled “Denial of Deduction for Settlements Subject to Nondisclosure Agreements Paid in Connection with Sexual Harassment or Sexual Abuse.” While the title of the section makes its purpose clear, the provision raises more questions than it answers.
The text of the provision makes clear that it only applies to settlements arising out of sexual harassment and sexual abuse claims where the settlement agreement requires non-disclosure of the underlying facts giving rise to the harassment or abuse claim and bars the parties from publicly discussing the terms of settlement. That simply means that if the settlement agreement prevents a harassment or abuse victim from publicly sharing details about the incident, then the person (or company) paying the settlement can’t deduct from taxable income the amount of the settlement or the attorney’s fees incurred in reaching the settlement.
Prior to this legislation, the law did not specifically govern sexual misconduct settlements, but generally permitted tax deductions for confidential settlements and for attorneys’ fees incurred in defense of such allegations.
The policy behind this provision is timely and undoubtedly motivated by the rising tide of the #MeToo movement. But what isn’t clear from the text of the legislation are the effects the provision may ultimately have on employers, persons accused of harassment, and victims of sexual harassment.
This provision raises several new questions:
- whether and how the deduction ban applies when only one part of the allegations concerns sexual abuse or harassment (for example, if the victim has also alleged gender-based discrimination or violations of the Equal Pay Act);
- whether the allegation of misconduct has to be supported by fact or otherwise proven to render the deduction lost; and
- whether the deduction ban applies to all the attorneys’ fees involved in defending against the allegation, or only the fees incurred in negotiating and/or drafting the settlement.
Given the significant new tax breaks to corporate taxpayers in the legislation, will this provision actually deter employers from seeking confidentiality in such settlements? To many large employers, the value of confidentiality will far outweigh the tax cost.
For those employers that decide not to insist on confidentiality in these settlements in order to retain a tax benefit, this provision could carry other costly consequences. For example, will public disclosure of sexual harassment claims open the company up to a wave of allegations arising out of the conduct of the accused or the conduct of others within the company? Will this provision instead discourage the speedy resolution of sexual misconduct allegations and payment to victims, incenting employers to fully defend against sexual harassment claims in litigation?
Another ostensible consequence of this provision falls on victims – they, too, will not be able to deduct attorneys’ fees incurred in pursuing sexual harassment claims. Will that consequence have a chilling effect on new claims?
We will not know the answers to these questions in the immediate future, and employers should begin planning for the consequences. Regardless of how this new provision impacts an employer’s taxes, employers should invest in robust training to prevent harassment and other forms of abusive conduct in the workplace.