Take two highly controversial issues - the #MeToo movement and President Trump’s policies (not to mention inflammatory , often questionable tweets), and what do we have? Another highly controversial topic, x 2. Harvey Weinstein’s actions brought to light a prevalent issue in Hollywood (and beyond) making it very clear that absolute power corrupts absolutely, especially regarding sexual pressure imposed on those lacking the power.
The stories have grabbed us by the collar, turned our attention to graphic scenes behind closed doors in the mysterious world of Hollywood, followed by questions that vacillate between public curiosity and harsh moral judgement. But, the events themselves are just one piece of the puzzle. There is another underlying issue that does not usually grab our full attention… the financial effects. While not as intriguing as the stories themselves, in this case, the public and your well-informed accountant are paying attention. Post-settlement finances can often be overlooked in the realm of heated social issues in this genre, but it does bring to the forefront another surprising impact to plaintiffs in these cases. It has been noted, and the effect can be surprisingly substantial.
As the need for reform was in the air, a tax law came to the table to address the financial elements of “hush hush” settlement cases. Nicknamed the “Weinstein Tax,” it prevents writing-off sexual harassment case settlement costs and legal fees for tax savings. Sounds good on the surface, preventing offenders from benefiting financially from the legal system and tax law. Why let the “filthy” rich get richer? (Pun intended.) A less desirable effect is that the offensive defendant is not the only one penalized by the law. Somehow, someway the law dictates that victims are financially penalized, too.
The tax code, Section 162(q) states, as follows:
(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."
In essence, by not stating which party’s fees can’t be deducted, interpretation is broadened to mean all parties, thereby preventing the victims themselves from writing off their legal fees, which are actually inflated in terms of how the law is applied. Additionally, this section of tax code makes specific mention to confidentiality agreements and legal fees, which are invariably key elements to every settlement, hence, the applicability is further broadened. To provide an example, if a plaintiff/victim is awarded $350,000 and owes her attorney $100,000, she would net $250,000. However, with Trump’s tax law the victim not only can’t write-off the $100,000, but she is actually taxed on it. The full $350,000 would be treated as taxable income, even though she only received $250,000. On the other side of the coin, the lawyer she used also must pay taxes on legal fees he or she received – in effect, resulting in double-taxation.
Double taxation has always been a controversial topic, leaving many to wonder if it’s even legal. Now, add in the loaded issue of sexual harassment and abuse of power, and it’s taken to a whole new level. So much so that The “Repeal the Trump Tax Hike on Victims of Sexual Harassment Act of 2018” (Officially titled, “A bill to amend the Internal Revenue Code of 1986 to repeal the Trump tax increase on victims of sexual harassment”) has gained momentum, as a force to change the current law, hopefully allowing victims to clearly be permitted to deduct their legal fees. While victims are technically permitted to deduct some relief under provisions related to physical injury and illness, there are loopholes that prevent the application, and the interpretation of this provision is not as clear cut as needed, therefore not enough victims can benefit from this provision.
Time will tell what, if any, change congress will implement. While much attention has surfaced around the presumably (or hopefully) inadvertent effect of the law, and while, despite its apparent self-explanatory incorrect intention, there are caveats, nuances and implications that congress must consider before acting to alter Trump’s double taxation law.
If you are a victim of sexual harassment, or know someone who is, be sure to add a consultation with not only a competent attorney, but also an accountant who knows the tax law and can help maneuver through its costly effects. Your accountant should not only be knowledgeable of the litigation, but also sensitive to the issue, pain and sensitivity involved.
