Work it Out Blog


Jan 18, 2018 by Jill C. McQueen

Anyone who has tuned into the news in recent weeks is surely aware of two things: that sweeping changes to the tax code have just been signed into law, and that prominent people in the worlds of politics, entertainment, and industry are being publicly called to account for acts of sexual assault and sexual harassment in unprecedented numbers. What may come as a surprise is that these seemingly unrelated news items have a point of intersection.  Section 162(q) of the Internal Revenue Code now provides that there will be no business deduction allowed for a settlement related to sexual harassment or sexual abuse if that settlement is subject to a nondisclosure agreement.

Until now, individuals or organizations resolving disputes in which sexual harassment or other sexual misconduct is alleged have routinely made it a condition of settlement that victims remain silent about their accusations. This promise of confidentiality, along with a release of all legal claims, is what typically motivates an accused to offer a financial settlement of a sex-based claim. 

This is likely to change under the new tax law, which provides:

(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.

Because the terms “sexual harassment,” “sexual abuse,” and even “nondisclosure agreement” are nowhere defined in the law, there is some uncertainty about the precise scope of the cases that will be subject to the unavailability of a business deduction. What does seem certain is that the revised tax code provision introduces a new consideration to the already complex process of negotiating settlements in cases involving sexual misconduct. The new rule regarding deductibility of settlement payments and legal fees will apply to payments made after December 22, 2017, the date on which the tax bill was signed into law, even if the settlement agreement itself was reached prior to that time.

Additional guidance may be forthcoming in the months ahead, and attorneys will surely seek ways to lessen the impact of the restriction. For now, a business making a payment to settle such a claim will have to choose between the ability to deduct the settlement and related attorney fees or the accuser’s nondisclosure of facts surrounding the claims of sexual misconduct.

For questions regarding the resolution of these claims—and for assistance in limiting your organization’s exposure to claims of sexual harassment—contact your Day Ketterer employment law attorney.

The content of this blog is for informational purposes only and is not intended as legal advice for any purpose. This blog is not intended to present an exhaustive summary of all applicable laws, or to take the place of legal advice.  If you have any questions regarding the law, please contact us for assistance.