Celebrities, Employment, Taxation: 2017 Tax Amendments Do Not Allow Tax Reporter To “Expense” Attorney’s Fees Expended In A Sexual Harassment/Abuse Nondisclosure Settlement

“Weinsten Tax” Meant To Disincentivize Sexual Perpetrators/Harassing Employers From Trying To Prevent Reporting By Victims.

            As a response to some sexual harassers/abusers requiring use of confidentiality agreements to silence victims, Congress in December 2017 amended the Tax Code in what has been dubbed the “Weinstein tax.”

            Several bloggers indicate the repercussions of this.

            Section 162(q) of the Tax Cuts and Jobs Act of 2017 disallows the deduction of any sexual harassment or abuse settlement and attorney’s fees related to such a settlement or payment if “such a settlement or payment is subject to a nondisclosure agreement.”  Going further in that same section, attorney’s fees related to such a non-disclosure agreement are not deductible as a business expense by the harasser/abuser/employer after December 22, 2017.  This means that the Act applies after adjusted gross income is calculated. Before that calculation, this “penalty” provision removes from income any attorneys’ fees paid “in connection with any action involving a claim of unlawful discrimination.” Under the Act, plaintiffs are not taxed on the attorneys’ fees recovered from an unlawful-discrimination lawsuit, while defendants cannot include the settlement and fees as an itemized deduction.

            Recently, based on some ambiguous “under this chapter” language, the IRS clarified that “recipients of settlements or payments related to sexual harassment or sexual abuse, whose settlement or payment is subject to a nondisclosure agreement, are not precluded by section 162(a) from deducting attorney’s fees related to the settlement or payment, if otherwise deductible.”   This means that the tax liability rests with the employer (given these situations most frequently occur in an employment setting).

            California itself has passed new laws relating to nondisclosure agreements.  Under Code of Civil Procedure section 1001, a claimant cannot be silenced in California from disclosing factual information concerning actionable behavior, although the claimant can keep his/her identity confidential.  Pursuant to Government Code section 12964.5, it is an unlawful employment practice to require an employee to sign a nondisclosure agreement that denies a claimant the right to disclose information about actionable conduct.