Earlier this month, former Olympic team doctor Larry Nassar was sentenced to 40 to 175 years in prison for molesting gymnasts and other athletes. It’s a victory for the courageous victims who stepped up and held Nassar accountable in court. The sentencing will also hopefully act as motivation for others in a similar situation who have not yet come forward. The more momentum the #MeToo movement gains, the more offenders will be punished for this horrible behavior.
However, the “Harvey Weinstein tax” included in the latest tax bill raises some questions about the monetary payout Nassar’s victims could potentially receive, should they prevail in subsequent litigation. In short, this new tax rule denies deductions in confidential sexual harassment or abuse settlements. If the athletes win a civil case against Nassar, will the IRS be the biggest beneficiary instead of the strong and fearless abuse victims who deserve justice?
According to Section 162(q) of the tax code, “No deduction shall be allowed … for any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or attorney’s fees related to such a settlement or payment.” In other words, if there is a non-disclosure agreement involved in the athletes’ or any other sexual abuse situation, those involved are no longer able to take a tax deduction on their payment, settlement, or legal fees. For the offender, this makes sense – someone like Harvey Weinstein should not be allowed to take a tax deduction on the fees he’s paid as a result of litigation for his immoral behavior. For someone like one of Larry Nassar’s victims, it seems vastly unfair that they should have to pay taxes on their settlement, which is intended to compensate them as fully as possible.
The mention of “settlement” in the Weinstein tax section is of particular concern to the plaintiffs in sexual abuse cases. If a non-disclosure agreement is involved in the situation, any resulting settlements will not qualify for a tax deduction. Plaintiffs will not be able to deduct attorney fees if they receive a monetary recovery from a sexual abuse case. That means they will pay taxes on the FULL settlement amount before attorney fees are taken. That could leave them with substantially less money if they prevail against their attacker.
This new situation is reminiscent of the bruise ruling, in which the IRS required proof of ‘‘observable bodily harm’’ to grant a tax deduction on the settlement recovery. In a 2008 memorandum, as Robert Wood points out, the IRS made an exception to this rule. Because settlement and jury award payments are typically made years after the abuse of a victim ended, the IRS allowed an assumption that there were physical injuries at one point, even if observable bodily harm could no longer be shown. In this ruling, the IRS gave a pass to people on whether their lawsuit recovery was taxable. Sadly, the new Weinstein tax may put that ruling in reverse.
At Milestone, we operate the only independent Global Assignment company built to solve tax problems inherent in taxable cases such as these ones, as well as whistleblower, false claims cases, and many others. The simple concept of spreading a multimillion-dollar recovery over 50 to 100 years alleviates the “peak year” concept that high-income executives, actors and professional athletes know all too well. Attorneys who litigate theses types of cases should take into consideration the IRS’s position in the case early, so their client fully understands what will happen to their piece of a potential recovery. If spreading the settlement payments out over time makes sense, and it puts more money in the pocket of the victim and less for the IRS, all the better.
We at Milestone commend the athletes for their bravery in standing up Dr. Nassar. Their voices not only hold him accountable, but they also amplify a movement that we hope will continue to gain traction across many industries.
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).