To Disclose or Not to Disclose, That Will Be the Question

by Christy D. Joseph and Mark A. Ziemba

Whether it be a Hollywood mogul, a renowned politician or a formerly respected executive, it is clear from the Me Too and Time’s Up movements that the voices seeking and stands taken to uncover and prevent sexual harassment have a momentum that has not been seen in decades. One additional mechanism that has been added to this toolbox was a small discrete paragraph added to the wildly heralded newly enacted tax legislation. The provision provides that no deduction shall be allowed 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 fees related to such a settlement or payment.” The laudable goal of the legislation is to prevent sexual harassers from having a tool to cover up their bad acts. The reality, however, is that many hotly disputed claims are settled to avoid the pain, expense and distraction of litigation. 

Nondisclosure or confidentiality provisions can be important provisions in the company’s decision to settle a matter and avoid the expense of litigation – expenses they cannot recover even if they win. Now companies will have to weigh whether the value of a nondisclosure agreement is worth the tax deduction they might otherwise be afforded. There are also many questions that remain unanswered. For example, if multiple claims are made in a case that settles, it is unclear whether there could be an apportionment as to those other claims which would protect the deduction for those claims and fees. In this case it is also unclear whether the deduction disallowance would apply to all fees paid in the case or only those directly associated with the settlement. Ironically, the provision does not differentiate between the company or alleged harasser’s deduction of fees and expenses and those of the individual making the claim of sexual harassment or abuse, so arguably she or he would also be penalized for agreeing to a nondisclosure provision in any settlement. On top of that, even if claimants were determined not to be covered by this particular provision, it is likely that deductions of legal fees by claimants would be “miscellaneous itemized deductions” and those are completely suspended for 2018 through 2025.