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#MeToo Settlements and the Tax Code Overhaul: No More Tax Incentive to Hush Victims

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.

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About this Author

Donald Davis, Lawyer, Employment,Mintz Levin Law Firm, Employment Litigation & Arbitration Discrimination & Harassment Employment Counseling and Training
Practice Group Associate

Don provides clients with representation and counsel on a broad range of employment matters. He has extensive experience handling issues pertaining to employment contracts, wage and hour disputes, employment discrimination, disability accommodations, retaliation, wrongful discharge claims, family and medical leave, defamation, and whistleblower rights.

Don has provided representation in litigation as well as alternative dispute resolution processes, and has negotiated a number of very favorable pre-litigation settlements for his clients. He has also defended employers before...

David Lagasse,Member, Mintz Levin, Private Equity Employee Benefits & Executive Compensation Employment Counseling and Training Employment Litigation & Arbitration

David has extensive experience handling executive compensation issues in mergers and acquisitions, venture capital investments, private equity financing, and other transactional contexts.

On behalf of buyers, sellers, and management teams, David drafts and negotiates the compensation and equity arrangements for senior-level executives that drive and reward performance. He is also skilled at structuring and implementing deferred compensation arrangements, performance bonus plans, option and restricted stock awards, synthetic equity plans and equity participation in limited liability companies, partnerships, and corporations. He is adept at structuring these arrangements to comply with the employment, corporate, tax, employee benefit, and securities law issues inherent in them.

He is also skilled at counseling clients and litigating with respect to a broad range of business issues, with an emphasis on employment law issues as they relate to business disputes and transactions. He assists corporate counsel and human resources personnel to develop strategies and documentation for handling sensitive employee situations.