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Amendment to IRC Section 162 - What are your thoughts?

Confidentiality agreements have become a renewed focal point of discussions among employment mediators. Will neutrals have a more difficult task resolving sexual harassment/abuse claims under the amendment to IRC Section 162 which now bars tax deductions for operating expenses for settlements subject to nondisclosure agreements?

Please provide your thoughts/comments below.

Comments (6)

IRC 162 now provides:

(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.

Subdivision 1 punishes employers by eliminating the deduction for the settlement amount and subdivision 2 punishes plaintiffs by removing their deduction for attorneys' fees when they settle their claims if the settlement agreement includes an NDA.

The net result, I believe, is that if employers in these cases continue to insist on NDAs, they will have to pay substantially more, in after tax dollars, to settle cases. The intended effect, to limit NDAs, may be achieved.

While well-intentioned, this was poorly thought through. How will a settlement containing an NDA on a claim with multiple charges (i.e. harassment and gender discrimination or an overtime claim) be handled under this rule? Will claims stop featuring harassment, in the same way many claims avoid "fraud" to keep insurance policies available for settlement?

Micalyn S. Harris:

Good question. All good points. Creative wording is likely to be developed.

I support the principle underlying IRC 162. The policy goal is to prevent the use of NDA's and confidentiality to protect perpetrators and allow them to continue their inappropriate conduct and victimize others. But I agree that the tool is imprecise. NDA's may serve to protect those who are accused but who may be innocent. For those who express reasonable concerns about this approach - please propose an approach you believe would be more effective.

Paul marrow:

The concept that people who make such settlements should not be allowed to do so at the taxpayers expense makes good sense. Too bad it took scandles in Congress to drive the point home. It may be true that there are flaws in the structure of the law but if that does create problems, the law will no doubt be amended accordingly. This seems to me to be a good first step.

i don't think this law will have a negative impact on the mediation of a sexual harassment claim. People don't settle just to get a tax benefit. Settlements will be made because of a host of other factors and those factors will now be more important than ever. The tax law will just not be something people will consider.

Perhaps this law will serve to discourage bad behaviour in the first place. One would like o think this will be the case. But experience seems to suggest that bad behaviour is an emotional issue requiring treatment. So in all likelihood, the bad behaviour will continue on the tax law notwithstanding.

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