The "Weinstein" Tax Provision: Friend or Foe?

Since the Harvey Weinstein story first broke in the New York Times, it catapulted the #MeToo movement into the spotlight. The #MeToo movement also shone a light on non-disclosure, or confidentiality, agreements. These allowed serial abusers such as Harvey Weinstein to pay off their victims under the cloak of secrecy – and continue their patterns of abusive behavior.

Congress jumped into the fray when it enacted tax reform legislation in December 2017, the Tax Cuts and Jobs Act of 2017. See Pub. L. No. 115-97, 131 Stat. 2054 (Dec. 22, 2017). Among many other things, this legislation amends Section 162 of the Internal Revenue Code, 26 U.S.C. § 162, which establishes deductions for certain trade or business expenses. New subsection (q) in Section 162 specifically addresses settlements in sexual harassment cases that are subject to a non-disclosure agreement:

(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.

In plain English, this means that there can be no business expense deduction for any settlement of a sexual harassment claim or any attorney fees associated with the settlement, if the settlement agreement contains a confidentiality, or non-disclosure, provision. Now, as a matter of federal tax policy, sexual harassers cannot get a tax break on money paid to silence their sexual harassment victims. Who could argue with that?

Tax lawyers, apparently. They point out a number of issues. One of those is that the Weinstein tax provision could apply to almost every settlement of an employment case. Settlements of other types of employment cases almost always include broad release language, purporting to release every claim arising from the employment relationship. These broad releases also cover any sexual-harassment claims. Therefore, even where the employee did not, or could not, raise a claim of sexual harassment, will a confidentiality provision prevent the employer from deducting the cost of the settlement, including the attorney fees paid to resolve the claim?

If the answer is yes, then an employer settling an age discrimination claim, for example, would have to choose between a broad release of claims and a confidentiality clause. This may be a choice that neither party to the case wants to make, especially where there is no harassment issue. Many claimants are also interested in confidentiality.  Making these provisions harder to include in a mutually drafted settlement agreement benefits no one.

In this sense, an undoubtedly unintended consequence of the “Weinstein” tax provision is that confidential settlements of employment disputes, without Congressional clarification, could become more difficult and expensive. Or, for those employers willing to take their chances on an IRS audit, settling an employment case could be quite risky. Again, not a result that benefits anyone.

But this isn’t the only potential problem with the Weinstein tax provision. The vague language could also make attorneys’ fees taxable to the harassment victim.  Stay tuned for more...

Author’s Note:  This blog post is adapted from a longer article that was co-authored with Lesley Weigand, Esq., and that appeared in the Winter 2018/2019 edition of the Ohio State Bar Association Labor & Employment Law Section Newsletter.