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While the 2017 Tax Cuts and Job Act was beneficial to many, the tax reform bill contains a short provision that could significantly affect how sexual harassment claims are settled for both Plaintiffs and Defendants.  Section 13307 of the Act provides:

 

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.”

The new tax provision eliminates a tax deduction for sexual harassment related settlements if the settlement or payment is subject to a nondisclosure or confidentiality agreement. In short, if the settlement is confidential, then the amount of the payment and any attorney fees are not tax deductible.  Sexual harassment settlements and related attorney fees remain tax deductible if they are not subject to a nondisclosure agreement.

The reason behind this change appears to be in response to the significant number of abuse claims that have been recently disclosed. This has raised concerns about companies hiding behind non-disclosure agreements to avoid public disclosure of sexual harassment in the workplace. It was thought this provision would make sexual harassment in the work place more transparent.

There are a number of unanswered questions regarding the application of the Act. No guidance is given regarding what is meant by “any settlement or payment related to a sexual harassment or sexual abuse.”  It is unclear whether related claims such as retaliation or violation of State Human Rights acts are considered related. One way to get around the Act may be to dismiss or settle the harassment claim for a nominal sum and attribute the rest to another non-sexual harassment claim. It is expected that this issue will be clarified in the future.

Another outstanding issue is whether the denial of deductibility applies only to companies making settlement payments and their own attorney fees, or if it applies to the attorney fees incurred by the victim as well. The Acts provision would appear to amend the IRS Code which allows deductions for ordinary and necessary trade or business expenses incurred. Depending on how interpreted it could apply to the attorney fees paid by the Plaintiff or paid on the Plaintiff’s behalf. This could result in the Plaintiff paying taxes on money that they never received. Some in congress are attempting to clarify this provisions so that it only applies to Defendants. To date the revision has not passed.

The provisions of this act went into effect on December 22, 2017.  Given the uncertainty of this provision it is important to get legal advice whether you are a company defending a sexual harassment or abuse lawsuit or are the victim of such harassment. The decisions you make could be very costly. If you have any questions or desire to discuss the issues raised herein please do not hesitate to contact me. My name is Steven R. Bratke and I have been involved in litigation for over 29 years.  I can be reached at srbratke@wvlawyers.com or 1-304-422-7193.  This article is written for informational purposes only and not intended to be legal advice or create any form of representation or relationship.

Who We Are

McNeer, Highland, McMunn and Varner, L.C. has been providing legal representation throughout the State of West Virginia since its inception in 1913. Not only has the firm met the needs of its diverse clientele, but we continue to exceed expectations in all aspects of our legal representation.

What We Do

The firm is a full service law firm with talented attorneys focused on all areas of law. For over 100 years, McNeer, Highland, McMunn and Varner, L.C. has been serving the legal needs of West Virginians. With this strong history of exceptional legal work, the firm continues to maintain a competitive edge in the legal market. Our cadre of impressive legal minds is able to keep us on the cutting edge of the law. The firm currently, as well as historically, continues to maintain an AV rating by Martindale Hubbell.

Where We Are

We have expanded our legal services over the years to meet the demands of our clientele and are able to service our clients in and throughout the State of West Virginia, as well as Pennsylvania, North Carolina and Ohio. Currently, the firm has four offices strategically located throughout West Virginia. In addition to the Clarksburg law office which continues to be the firm’s central location, we have offices in Parkersburg, and Kingwood.

Why Us?

It is important for us to provide the highest quality of legal representation to our clients. We also want to serve our communities so that we have better places in which to live and work. McNeer, Highland, McMunn and Varner built its reputation on trust, service and relationships in an ever-changing world. These values continue to be the cornerstone of the firm as we enter our second century of service.

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“McNeer, Highland, McMunn & Varner LC is well-known for meeting the challenges of its clientele in a very straightforward manner while maintaining a close attorney-client relationship. The attorneys on staff provide dedication to detail and professionalism to each client in a variety of practice areas. We are large enough to handle all your legal needs, and small enough to care.”

– James N. Riley (Director/President)