Sexual Abuse or Harassment Settlements Subject to Tax Liabilities

Sexual Abuse or Sexual Harassment Settlements Subject to Tax Liabilities

The 2017 Tax Cuts & Jobs Act which includes Internal Revenue Code §162(q) was recently passed by Congress.  Under § 162(q):

• No deduction is allowed for any settlement or payment related to sexual harassment or sexual abuse if the settlement or payment is subject to a nondisclosure agreement.
• No deduction is permissible for attorneys’ fees related to a confidential sexual harassment settlement or payment.

The real interesting part of the IRS code is that payments for Sexual Abuse or Sexual Harassment remain tax-deductible, if they are not subject to a nondisclosure agreement.  In other words, if a Sexually Harassed client settles their case with a confidentiality clause, they will be subjected to tax liability.  Plaintiff’s lawyers now have to insist that settlements are not confidential.  This is going to now put Plaintiff lawyers in an ethically challenging situation.

Section 162(q) is relevant because most, if not all, settlement agreements tend to include confidentiality or nondisclosure clauses. The provision appears aimed at preventing companies and their executives from avoiding public scrutiny about unlawful sexual conduct in the workplace, but in reality is putting a burden on the injured party.

One work-around may be to structure settlements across multiple claims, and place only a small portion to the sexual harassment claim in a non-confidential settlement agreement, with the remainder allocated to other claims under a separate, confidential settlement agreement; if this is a viable option.