Why are Republicans punishing sexual harassment victims in the tax bill?

Tucked away in the tax bill is a little-noticed provision that disallows deductions for payments related to sexual harassment or sexual abuse settlements that are subject to nondisclosure agreements. This is one loophole that most Americans probably didn’t realize existed, let alone needed to be closed.

The motivation for including this provision in the bill is obviously the ongoing sexual harassment scandals in Congress and in corporate America. What is surprising, however, is the provision’s astonishingly poor draftsmanship and heavy-handedness. But in the haste to pass a tax bill with no hearings and little public input, this surely will not be the only surprise to be found among the tax bill’s hundreds of pages of provisions.

{mosads}Surely, few would object to creating a tax disincentive that deters perpetrators or their employers from covering up sexual harassment or abuse by trying to keep victims quiet. But that is not all the tax bill does. The bill targets victims, too.

For tax purposes, victims often are required to report the full amount of a settlement as income — even the part paid over to their attorneys. But the victim is allowed a deduction for the attorney’s fees so that the amount taxed is equal to the portion of the award the victim keeps. If the tax bill passes into law, it appears that victims no longer would be permitted this deduction if they enter into nondisclosure agreements.

As a result, victims would be taxed on the entire amount of the settlement — that is, on more than they actually keep. Where attorney’s fees are a large portion of the settlement, victims actually might end up worse off after taxes than if they never had come forward at all.

You might chalk this up to rounding out the disincentive to enter into nondisclosure agreements, but this ignores that the victim might have reasons for seeking a nondisclosure agreement. For example, if the perpetrator is someone well known, a victim might not wish to be hounded by the news media — attention that might only add to their victimization and make future employment difficult or impossible.

The tax bill provides no possibility of considering such situations, disallowing all deductions regardless of the motivation for the nondisclosure agreement and potentially dampening the willingness of victims to come forward in the future.

What’s more, the disallowance provision is so broadly written that it might disallow deductions not only for settlement payments and attorney’s fees but also for an untold number of other expenses. For example, the provision can be read to disallow a medical expense deduction for a visit to a psychologist if the substance of what was talked about in therapy — perhaps years after a case was settled — related to earlier harassment or abuse that was subject to a nondisclosure agreement. Generally, the burden of proof lies with the taxpayer, so the burden would be on the victim to prove a medical expense deduction should be allowed.

And the victim is the only one who would be penalized in some of the highest-profile scandals. The provision in the tax bill would have no impact on members of Congress who have turned to the federal Treasury to pay for their sexual harassment settlements. The payor in these cases is the United States, not the member of Congress, and the United States is not a taxpayer and doesn’t worry about the deductibility of its expenses. The same can be said about the Roman Catholic Church in sexual abuse cases; as a charitable organization, it is likewise unconcerned with deductions because of its tax-exempt status.

Making matters worse, the tax bill would disallow deductions for any payments made after the bill becomes law — even if the nondisclosure agreement was entered into years earlier. This may require victims to revisit episodes that they thought had closed in order to discuss terminating a nondisclosure agreement so as to reopen the possibility of taking deductions that this provision would sweep off their tax returns.

Clearly, haste not only makes waste but also very bad law.

Anthony C. Infanti is a professor of law at the University of Pittsburgh School of Law whose research and teaching focuses on tax law.