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Tax-law typo risks bankrupting #MeToo victims

A marcher carries a sign with the popular Twitter hashtag #MeToo used by people speaking out against
A marcher in Seattle in January carries a sign with the hashtag #MeToo, used by people speaking out against sexual misconduct.
(Ted S. Warren / Associated Press)
Bloomberg

Republicans are considering a fix to a provision in their new tax law that they acknowledge could inadvertently penalize victims of sexual harassment in the workplace.

But congressional gridlock before midterm elections in November means there’s no guarantee that the problem will be corrected quickly, if at all.

President Trump’s tax overhaul eliminates the deduction that companies could take when they settled sexual harassment cases and included nondisclosure agreements, which generally keep details secret as a condition of the payout. A misplaced word by Republican tax writers may mean that victims accusing people such as Hollywood producer Harvey Weinstein of sexual misdeeds also lose the ability to deduct their legal expenses.

A senior House Republican aide who works on tax policy acknowledged the provision has unintended outcomes and is being discussed as a “technical correction” to the tax law. A senior Senate Republican aide said lawmakers are examining the issue. Both aides were granted anonymity to discuss private conversations.

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In the meantime, plaintiffs’ attorneys are buzzing about how the law’s ambiguity is worrying their clients, who fear that coming forward about sexual harassment could come at a much greater cost.

“There’s this concern that because of the 2017 tax act, that somehow we’re going to get back to that original system which obviously penalizes, to an extraordinary extent, against the victim,” said Genie Harrison, who represents one of Weinstein’s former personal assistants in a sexual harassment lawsuit.

That’s not what the law was supposed to do. Republican lawmakers on the Senate Finance Committee agreed in mid-November to include an amendment from Sen. Bob Menendez (D-N.J.) to help make the use of nondisclosure agreements less attractive after a flurry of sexual misconduct allegations.

The backlash against nondisclosure agreements has been fueled by examples such as Weinstein and former Fox News anchor Bill O’Reilly, where the contracts helped hide allegations of misconduct.

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Weinstein scandal puts nondisclosure agreements in the spotlight »

California, Alaska and Washington are among more than a dozen states considering laws that prohibit confidential settlements entirely or add new limits.

So far, about 300 executives and other high-profile people, mostly men, have been accused of sexual harassment or other improper behavior related to the #MeToo movement, according to New York crisis counseling company Temin & Co., based on an ongoing count of actions pulled from media coverage and other public information. That number doesn’t include actions taken that weren’t made public, according to Temin.

The original provision made clear that the deduction change applied only to the company, not to the victim, according to Steven Sandberg, a spokesman for Menendez. Republican tax writers used the word “chapter” rather than “section” in the amendment, which could be interpreted as broadly applying the elimination to victims.

Sen. Orrin Hatch (R-Utah), chairman of the Senate Finance Committee, is continuing to meet with committee members to address any concerns with the new law and examine potential technical corrections, should they be needed, said Julia Lawless, a spokeswoman for the panel.

Menendez is trying to get an amendment through the Finance Committee or a new law passed to make that clear, Sandberg said in an email. The proposed bill to clarify that victims’ writeoffs are exempt is called the Repeal the Trump Tax Hike on Victims of Sexual Harassment Act of 2018.

Funding bill

With the midterm elections looming, the prospects of a technical revision to the tax law — passed without a single Democratic vote — are far from certain. Republicans control 51 seats in the Senate, and 60 votes would be required for a bill to correct any errors. Democrats have signaled they’re reluctant to approve any legislation that would fix a tax bill they never signed on for — much like Republicans did after Democrats tried to modify the Affordable Care Act. Or they may ask for something in return that Republicans are unwilling to provide.

Another option may be tacking a fix onto the government funding bill that has to pass by the end of September to avert a government shutdown. The previous funding bill, which Trump signed in March, included a correction to a measure in the tax law affecting farmers — so far, the only other time Republicans have highlighted a specific provision in need of a change. Some Democrats agreed to back the spending bill since it included other changes viewed as policy victories for both parties.

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If the rule isn’t clarified soon, there’s a risk future victims will stay silent, said Harrison, who practices in Los Angeles. There’s less incentive if winning the case means an untenable tax burden, she added.

For example, in a $100,000 settlement, costs and fees might take $45,000, with $55,000 going to the victim. Without the deduction, the victim would pay taxes on the entire $100,000, which may mean a tax bill equal to or larger than their payout, she said. Defendants this year have said they aren’t willing to add additional money to compensate for the potential added tax penalty, Harrison said.

Other claims

It’s also unclear what happens in cases that include both sexual harassment and other claims, such as pay bias or gender discrimination, said Bruce Schwartz, a benefits and tax law attorney at Jackson Lewis in White Plains, N.Y. Legal costs associated with settlements for other forms of bias should still be tax deductible, but the ratio may be unclear, he said.

Trying to change behavior through tax law isn’t a new idea, nor is it usually very effective, said Schwartz. When voters were upset about high salaries paid to chief executives, lawmakers limited the deductibility of CEO pay to the first $1 million. Companies then just shifted more of the compensation away from salary, he said.

“It’s what I would call Congress legislating in response to newspaper headlines and using the Internal Revenue Code to enforce social policy,” Schwartz said. “To use the Internal Revenue Code to do that is useless.”

Even if the nondisclosure ambiguity is fixed by Congress, the broader rule could still keep many victims quiet. That’s because it will be more expensive for a company to keep the details of the case confidential — an option some victims may actually prefer, said Elisa Lintemuth, an employment lawyer at Dykema Gossett in Grand Rapids, Mich., who represents companies in cases.

“I do think it will change how cases are litigated and settled,” said Lintemuth, who discussed uncertainty on a recent conference call with company clients. “If a company can no longer deduct its settlement and attorney fees, they might be more likely to roll the dice and proceed with litigation even if attorney fees will be more expensive. They can have the option of being vindicated in court and deduct all their fees.”

Green and Kapur write for Bloomberg.

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