New Tax Law Could Penalize Victims of Sexual Harassment

Republicans are considering a fix to the so-called Harvey Weinstein provision in their new tax law that they acknowledge could inadvertently penalize victims of sexual harassment in the workplace.

Section 162(q) of the Tax Code provides:

“PAYMENTS RELATED TO SEXUAL HARASSMENT AND SEXUAL ABUSE. — No deduction shall be allowed . . . 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.”

The provision was meant to stop defendants in sexual harassment cases from being able to deduct their legal fees and their settlement payments where they require confidentiality from their accusers in legal settlement agreements. But the law actually reads that the plaintiff accusers also cannot deduct their legal fees. Of course, most legal settlement agreements have some type of confidentiality or nondisclosure provision. The result is that if a plaintiff recovers $500,000 but must pay her lawyer 40%, the full $500,000 is taxable income to the plaintiff even though she only receives $300,000 (the other $200,000 going to the lawyer). This means the victim is paying tax on money she never receives.
A senior House Republican aide who works on tax policy acknowledged the provision has unintended outcomes and is being discussed as a so-called technical correction to the tax law.

A senior Senate Republican aide said lawmakers are examining the issue. But congressional gridlock before midterm elections in November means there’s no guarantee that the problem will be corrected quickly, if at all. In the meantime, plaintiffs attorneys are buzzing about how the law’s ambiguity is worrying their clients, who fear that coming forward about sexual harassment could now come at a much greater cost.

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