On December 20, Congress passed a comprehensive tax reform bill (the Act) that the President signed into law on December 22. There is one provision of the Act that is of interest to employment litigators and their clients. New §162(q) of the Internal Revenue Code of 1986 eliminates the deductibility of amounts paid in connection with settlement of sexual harassment and sexual abuse claims if the settlement agreement requires nondisclosure on the part of the employee.
By way of background, a taxpayer generally is allowed a deduction for ordinary and necessary expenses paid or incurred in carrying on any trade or business. I.R.C. §162(a). Settlement payments made to claimants in connection with employment-related disputes are, thus, treated as deductible business expenses by employers, including related attorney fees. Similarly, plaintiffs who sustain attorney fees in connection with settlements of employment disputes may deduct such fees. Section 162(q) eliminates those deductions in cases of settlement of sexual harassment and abuse claims that condition the settlement on non-disclosure.
