Mediation Message No. 140

THE NEW TAX CODE AND SEXUAL HARASSMENT OR SEXUAL ABUSE SETTLEMENTS

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Obscured by the politics of that legislation was an amendment (subd. (q)) to 26 U.S.C. § 162 (trade or business expenses) of the Tax Code which states, “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.”
This new law is both clear and unclear. It is unambiguous that the amendment is directed at disallowing deductions for settlements related to sexual harassment or sexual abuse matters that have nondisclosure agreements and that attorney’s fees related to those settlements are also not deductible. The statute does not affect settlement for state or federal claims related to other typical employment causes of action.

Unclear are the following:

  • What is the meaning of “related,” which is not defined, in “any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement,” where the original claim typically includes not only sexual harassment and abuse allegations but other employment matters, as well (e.g. sex discrimination, retaliation and wage and hour violations), and the settlement includes the dismissal of all of the claims? Depending on the applicable facts, it is arguable that the sexual claims are both connected or not connected to the other causes of action, whereas it is more obvious that a meal, rest break or wage claim is separate and apart from any harassment and abuse claims.
  • To avoid subd. q’s consequences, may the settlement specifically pay the entire amount for non-covered claims (such as sex discrimination and retaliation) and nothing for harassment and abuse claims? And, to be effective, what should that language consist of?
  • Does the prohibition against deducting attorney’s fees, if there’s a confidentiality clause, apply only to defendants or to both plaintiffs and defendants? Logically, it appears to apply only to defendants because the attorney’s fees language is arguably part and parcel of the prohibition against deducting the settlement where there’s a confidentiality clause. Nevertheless, in the absence of clarifying language, plaintiffs’ counsel may not be allowed to deduct their fees as business expenses, if such fees are being deducted.
  • Costs are not mentioned in the new legislation. Can they still be deducted even if attorney’s fees cannot?

Judge Michael D. Marcus (Ret.)
ADR Services, Inc.
1900 Avenue of the Stars, Suite 250
Los Angeles, California 90067

(310) 201-0010

Copyright Michael D. Marcus, January 2018

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