The Legal Intelligencer
(by John McCreary)
The Tax Cuts and Jobs Act of 2017 inserted a new subsection (q) into Section 162 of the Internal Revenue Code which denies deductions for payments made in settlements of sexual harassment or sexual abuse cases, and “related” attorney fees, when those settlements are subject to a confidentiality agreement: “(q) Payments related to sexual harassment and sexual abuse. No deduction shall be allowed under this chapter for:
- Any settlement or payment related to sexual harassment or sexual abuse if such a settlement or payment is subject to a nondisclosure agreement, or
- Attorney fees related to such a settlement or payment.”
This provision was added by amendment in the Senate and accepted by the House in the final enactment.
The Conference Committee Report (the report) on the amendment does not disclose the rationale for the change, but it is safe to infer that it was inspired by the sordid revelations about widespread sexual harassment that were making headlines when it was passed on Dec. 20, 2017. See, e.g., https://www.ajc.com/news/world/from-weinstein-lauer-timeline-2017-sexual-harassment-scandals/qBKJmUSZRJqgOzeB9yN2JK/ (published on Dec. 19, 2017). The report contains no interpretive guidance on the meaning of “related to” as used in the statute, nor does it define what is meant by a “nondisclosure agreement.” The report simply notes that while Section 162 generally allows for the deduction of “ordinary and necessary” business expenses, various subsections disallow deductions for certain payments, such as portions of damages awarded under antitrust laws, illegal bribes or kickbacks, and criminal fines. In reaction to the headlines Congress has concluded that confidential payments resolving sexual harassment claims can no longer be considered “ordinary and necessary.”
As with many efforts by Congress to provide quick fixes to perceived problems, the unintended consequences of this quick fix will likely create more uncertainty and controversy than will be resolved. …