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What Do Sexual Harassment and Taxes Have in Common?

By Procopio Partner Phillip L. Kossy

While you might think this continues with a joke about walking into a bar, the truth is that the current cultural/legal upheaval surrounding sexual harassment and misconduct and the just-enacted tax reform bill actually do intersect in at least one direct way — buried in Section 13307 of the “Tax Cuts and Jobs Act,” located on page 206 of 503.

Section 13307 of the new legislation amends Section 162 of the Internal Revenue Code pertaining to “ordinary and necessary” business expenses that may be deducted from income.  New Section 162(q) of the IRC prohibits the deduction of “any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement” or of the attorney’s fees related to such settlement or payment.  In other words, the amount of any settlement of a sexual harassment claim that is subject to a confidentiality agreement, or the attorney’s fees related to the case, are no longer allowed as deductions on a business’ federal tax return.

STOP WHAT YOU’RE DOING!  This new provision applies “to amounts paid or incurred after the date of the enactment of this Act,” which was December 22, 2017, when the Act was signed by the President.  So, any such payment made after that date is not deductible.  And, even if not yet paid, any payment due or any obligation by reason of an enforceable agreement to make such payment will not be deductible by the business on its federal tax return.

Whether one agrees or not with the rationale for this provision, it is merely one small example of the “meat grinder” that is the legislative process.

Phillip L. Kossy is a Partner in Procopio's Labor and Employment Law Practice Group. He represents private and public sector employers in discrimination and harassment litigation, wage and hour litigation (class and individual claims), wrongful termination litigation and violence in the workplace matters.  Additional areas of emphasis include breach of employment contract, defamation and unfair competition issues.  He also counsels employers on a whole range of employment issues including harassment, discrimination, employee discipline and termination, workplace violence, medical issues in the workplace, social media and wage and hour compliance with the goal of claim and litigation avoidance.