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The New Section 162(q) of the 2017 Tax Cuts & Jobs Act: The Price of Confidentiality in Sexual Harassment Cases, #NoDeduction by Sandra R. Brown

In the wake of numerous allegations of sexual assault and sexual harassment involving well-known entertainment and media notables such as producer Harvey Weinstein, actors Kevin Spacey and James Franco, NBC News anchor Matt Lauer, CBS News host and journalist Charlie Rose, and Hip Hop mogul and producer Russell Simmons, just to name a few, the year 2017 saw a ground swell in Hollywood of those who were willing to speak out. What began as a Hollywood phenom quickly spread beyond the entertainment world to the global forum, symbolized by just five letters and a hashtag – “#MeToo.”

In November, the world saw the #MeToo movement reach a further pinnacle when TIME Magazine unveiled its annual “Person of the Year”, recognizing not one person, but a group of five, equally well-known women in the entertainment industry, along-side the caption “The Silence Breakers.” Last week, the voice of those women reached a new level when one of the women, Ashley Judd, filed a lawsuit against Harvey Weinstein.

The civil case, captioned Ashley Judd v. Harvey Weinstein, which was filed in California Superior Court on April 30, 2018, alleges defamation, sexual harassment, and intentional interference with prospective economic advantage, among other things. While not specifying an amount of damages sought, the complaint seeks financial damages as well as equitable relief, and the payment of attorney’s fees.

It may be that the recent change in the federal tax laws involving the deductibility of damages and attorney’s fees paid in connection with claims of sexual harassment played a part in the decision to file a very, public lawsuit versus what historically would, more likely than not, have been a quiet settlement cloaked in a contractual non-disclosure agreement (“NDA”).  For many, the enactment of Section 162(q) of the Internal Revenue Code, effective December 22, 2017, may be viewed as a potential gamechanger vis-à-vis the financial implications to anyone involved in the payment, and/or receipt of a payment, in relation to the resolution of claims of sexual harassment or sexual abuse.

Federal Tax Law: Pre-2017 Tax Cuts & Jobs Act

Prior to December 22, 2017, employers were generally permitted to deduct not only the payment for a settlement or judgment involving allegations of sexual harassment at their place of business, but also the legal fees incurred in the defense of such a complaint, as ordinary and necessary expenses incurred in the carrying on of a trade or business.[i]

Likewise, where the claimant paid attorney’s fees and court costs in connection with the recovery of amounts in connection with a cause of action for discrimination or any other action that is unlawful under any number of federal, state or local laws including Title VII and the ADA, as a general rule the claimant would be entitled an above the line deduction[ii] for such fees and costs, unless legal fees were allocable entirely to a non-taxable award or settlement.[iii] Absent strong support to the contrary, legal fees relating to an award or settlement that is partially taxable will be allocated based on the ratio between the taxable award/settlement and the total award/settlement.[iv] And, while, even in the absence of an above the line deduction, there may have previously been a lesser, but still valuable, below the line deduction[v] available for such expenses, it is worth noting that the current changes in the federal tax laws have likely resulted in, if not the elimination of, at least the reduction of, most itemized deductions.

As a result, an understanding of the implications of new Section 162(q) could not be more timely or important.

Federal Tax Law: Post-2017 Tax Cuts & Jobs Act

In passing the 2017 Tax Cuts & Jobs Act, Congress also enacted a new Internal Revenue Code provision – Section 162(q).  Dubbed by many as the “Harvey Weinstein Tax”, Section 162(q) is not a new tax, but is rather a new limitation on the ability to deduct certain payments made by businesses in connection with claims of sexual harassment and sexual abuse subject to NDAs.

Section 162(q), which is effective for all amounts paid or incurred after December 22, 2017, specifically states:

 (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.”

To date, neither Congress nor the IRS has provided guidance as to the scope of this new provision. And while it is largely understood that Section 162(q) was enacted as a legislative effort to discourage confidentiality clauses in sexual harassment settlements, one of the biggest questions yet to be answered is whether Section 162(q), in its final drafting, created an unintended ambiguity. For example, did Congress intend, by including the words “under this chapter,” to eliminate the deduction for attorney’s fees for both the payor and the recipient where the payment is the subject of a NDA, or was it the true intent that this limitation apply solely to the payor in such a situation?

At least one Senator has called for a legislative fix, suggesting publicly that the legislative intent was that this provision applies only to the payor of such settlements. On the IRS’s part, while they have their work cut out in providing direction on many aspects of the new Tax Act, when it comes to guidance on Section 162(q), the most recent comment from the IRS, simply reads:

No deduction for certain payments made in sexual harassment or sexual abuse cases.

For amounts paid or incurred after December 22, 2017, new section 162(q) provides that no deduction is allowed under section 162 for any settlement or payment related to sexual harassment or sexual abuse if it is subject to a nondisclosure agreement.  In addition, attorney’s fees related to such a settlement or payment are not allowed as a deduction.[vi]

California Law: SB 820

On January 3, 2018, following the enactment of Section 162(q), the California Legislature, and with a similar intent of curtailing the use of NDA provisions in settlement agreements involving sexual harassment and sexual assault, as well as gender discrimination, introduced SB 820.

SB 820, as currently drafted, would expand California’s current prohibition which bars the inclusion of a NDA in a settlement agreement involving specifically enumerated sexual offenses, to also preclude, subject to limited exceptions, the ability of either a Court or the parties to include a NDA in a settlement agreement which include claims of sexual assault, sexual harassment, or harassment or discrimination based on sex.  One of the limited exceptions is where the NDA is at the request of the claimant.

But for the picture of the arm and elbow of the anonymous women reflected in the lower corner of the front page, poignantly included with the five, well-known women, including Ashley Judd, selected as “Person of the Year” by TIME Magazine, one might be left to wonder who would fall under the exception carved out by SB 820 in light of the still yet to be determined financial and tax impact of Section 162(q).

Maybe the answer to that question can be found in the recent business decision made by Weinstein Company Holdings, LLC, which in March of this year announced that, in addition to filing for bankruptcy and entering into an agreement to sell all of its assets, it had agreed to release victims of and witnesses to sexual misconduct from NDAs which were used by Harvey Weinstein, one of the co-founders of the Company.


Sandra R. Brown is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., and specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court.  Prior to joining the firm, she served as the Acting United States Attorney, the First Assistant United States Attorney and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal).  Ms. Brown may be reached at brown@taxlitigator.com or 310.281.3217.


[i]  26 U.S.C. § 162.
[ii]  26 U.S.C. § 62(a)(20).
[iii]  26 U.S.C. § 265(c).
[iv] Johnson-Waters v. Commissioner, T.C. Memo. 1993-333; Church v. Commissioner, 80 T.C. 1104, 1110 (1983).
[v]  26 U.S.C. § 67.
[vi]  https://www.irs.gov/…/settlement-of-attorneys-fees-related-to-sexual-harassment.

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