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John Bair
John Bair
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Weinstein Tax On Sexual Harassment Settlements: Bad for Plaintiffs?

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As the #MeToo movement gained momentum over the past few months, we have seen accusations of sexual harassment by more and more celebrities. This week, Dr. Lawrence G. Nassar, the former doctor for the American gymnastics team, was sentenced to 40 to 175 years in prison for multiple sex crimes against Olympic athletes and many other women.

sexual harassment and Weinstein taxIn court cases involving sexual harassment, companies and people legally used to be able to take tax deductions on settlements and attorney fees spent on settling a suit because it counted as a “business expense.” But the “Harvey Weinstein tax” included in the new tax bill denies deductions in confidential sexual harassment or abuse settlements. The rule applies to both lawyer fees and settlement payments. According to Section 162(q) of the tax code:

(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 other words, if there is a non-disclosure agreement involved in the situation, the business or person involved is no longer able to receive a tax deduction on their payment, settlement, or legal fees. For sexual harassment suits that will continue to involve a non-disclosure agreement, the business is now required to pay the settlement or award as well as the legal fees and then the taxes on top of the payments.

There are several implications for this change:

  1. Companies and people may start to forego non-disclosure agreements so they can still get the tax deduction. However, foregoing an NDA means, the details of the harassment and the lawsuit could be made public, and that carries with it the potential to destroy careers, companies, and lives.
  2. Companies and people may start to offer lower settlements with a non-disclosure agreement, in order to minimize the amount of  taxes they’d have to pay on the  settlement.

There is an unfortunate negative potential consequence to this new “Harvey Weinstein tax.” Since the tax code also notes that settlements do not qualify for a deduction when there is a non-disclosure agreement involved, a plaintiff will not be able to deduct their attorney fees if they receive a settlement from a sexual harassment case.

For example, if a plaintiff wins $100,000 in a sexual harassment suit but owes his or her attorney 40 percent in attorney fees, the plaintiff keeps $60,000. However, without a deduction, the plaintiff will still have to pay taxes on the full $100,000 settlement. That could be another $20,000 out of the plaintiff’s pocket, which could leave him or her with a meager $40,000 when all is said and done.

This issue was most likely not an intention behind the new tax code. But unfortunately, the language was not written to apply exclusively to the defendant — if it simply said “payments” it would not apply to the plaintiff.

Only time will tell the extent to which this change to the tax code will affect those who have come forward to hold someone accountable for hurting them.

 

 

 

About John Bair

John Bair has guided thousands of plaintiffs through the settlement process as co-founder of Milestone Consulting, LLC, a broad-based settlement planning and management firm. Milestone’s approach is comprehensive and future-focused. John’s team has guided thousands of clients by taking the time to understand the complexities of each case. They assess the best outcome and find the path that enables each client to manage their many needs. Read more about Milestone Consulting at http://milestoneseventh.com/.

 

 

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