Sexual harassment and abuse settlement recipients may deduct attorney’s fees

Tax Hot Topics newsletter In a recent FAQ posted to its website, the IRS clarified that recipients of sexual harassment and abuse settlements that are subject to a nondisclosure agreement are not precluded by Section 162(q) from deducting attorney’s fees related to such settlements.

Congress enacted Section 162(q) through the Tax Cuts and Jobs Act (TCJA) in response to the numerous sexual harassment scandals within the film industry. Its purpose is to provide greater transparency to sexual harassment issues and penalize individuals and companies for offering “hush money” to sexual harassment victims in an effort to cover up such incidents. Specifically, Section 162(q) disallows a deduction for (i) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, and (ii) attorney’s fees related to such settlement or payment.

However, the language under Section 162(q) can be broadly construed to apply to both employers and employee plaintiffs involved in sexual harassment and abuse lawsuits. To alleviate doubts, the FAQ confirms that the Section 162(q) deduction disallowance does not apply to the attorney’s fees of the recipients of sexual harassment settlements that are subject to nondisclosure agreements. This clarification is consistent with the position taken by the Joint Committee on Taxation in its December 2018 Bluebook, which offers a general explanation of the TCJA.

Jeff Martin
Partner, Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director, Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate, Washington National Tax Office
T +1 202 861 4107

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