In case you missed it, USA Gymnastics (USAG) just filed for bankruptcy in the wake of the sexual assault lawsuits against former physician Larry Nassar. The move, according to USAG, will help “expedite an equitable resolution of the claims made by the survivors of sexual abuse …. We owe it to these brave women who have come forward.” But what will USAG’s bankruptcy really mean to the hundreds of abused women for which USAG may be held accountable?
For one, the filing will suspend all Nassar sexual abuse lawsuits — which could involve as many as 400 claimants — including the investigation into whether anyone at USAG and the US Olympic Committee knew about Nassar’s conduct and looked the other way. If USAG and/or the Committee is found to have known and failed to stop the sexual abuse, the organizations could be on the hook for a staggering amount of money. Just earlier this month as part of its settlement, Michigan State University paid $500 million into a fund for 332 claimants who survived Nassar’s abuse.
Regardless of the outcome of the bankruptcy, any potential settlements with USA Gymnastics may be taxable under President Trump’s new tax reform law, which prevents individuals and businesses from getting a tax write-off from the settlements and related legal fees. 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, 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 businesses involved are now required to pay the settlement or award as well as the legal fees and then the taxes on top of the payments.
In other words, if there is a non-disclosure agreement involved, 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 businesses involved are now required to pay the settlement or award as well as the legal fees and then the taxes on top of the payments. No one feels bad for USAG if this will be the case for them. They shouldn’t be given any breaks.
However, as we have discussed before, this new tax law could actually be harmful for plaintiffs as well. The aforementioned new tax law under Trump includes what has been called the “Harvey Weinstein tax”, as it came on the heels of the #MeToo Movement. By stating the above Section 162(q), the law will mean that the sex abuse victims will not be able to deduct their attorney fees if they receive a settlement from a sexual harassment case. To them, this is simply adding insult to injury.
Consulting with a tax expert and a settlement planner is critical in making the most of a financial recovery stemming from one of these horrific situations. There is no reason the IRS should receive a windfall from these types of cases; navigating them closely is the best course of action. Our firm has been involved in hundreds of seven-figure settlements for sexual harassment, sexual discrimination, and sexual assault, and we can say for sure that each case can be very different.
Unfortunately, this financial move by USA Gymnastics is likely geared to limiting or eliminating the claims by the young athletes. They may try to make it sound like it won’t harm anyone, but that is likely not the case. It also may not be an effective move. Last year, the U.S. Supreme Court denied General Motors’ (GM) efforts to use its bankruptcy to block lawsuits over injuries and financial losses related to its ignition switch defect.
USAG’s bankruptcy will be a sensational story to which we’ll stay tuned.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).