Sexual harassment has been in the news repeatedly in 2017. One of those in the news is Harvey Weinstein. Weinstein’s name has even been associated with the tax reform bill, the Tax Cut and Jobs Act, in the U.S. Senate. The so-called “Weinstein tax” is not a tax at all. San Francisco tax lawyer Rob Wood talks explains the proposal in this report. He also discussed the proposed law change in a Forbes article, “Harvey Weinstein Tax Would Prevent Sex Harassment Settlement Write-Offs.”
Wood explains that the past weeks have seen many important men fired or eliminated from their companies over sexual harassment charges. Weinstein is one of the biggest names in the harassment news. The Senate’s tax bill would make an important change in the law by eliminating the tax deductibility of sexual harassment settlement payments where the settlement includes a confidentiality provision. “That would apply not only to the settlement payment itself . . . but also to any associated lawyers’ fees.” The provision has not passed yet, but that is what is proposed in the Senate bill.
Under the current law, Wood says, most payments in situations like these are written off and deducted. Legal fees and the costs of lawsuits against a business are legitimate business expenses. This is true of settlement payments as well as verdicts by a court. This includes expenses associated with all kinds of discrimination lawsuits. “All of these things end up as tax deductions by businesses.”
Wood points out that there might be a different rule if an employee of a business were sued for violating some anti-discrimination law, but that issue almost never appears in the real world. “In my experience, that’s fairly rare. . . . Normally, everybody gets sued.” Generally speaking, Wood says, the company pays to settle the case, and everything is written off as a business expense.
Wood notes that the tax bill produced by the House of Representatives does not include this provision. There was some talk about including a “Weinstein tax” in the House bill, but it didn’t happen. If the Senate bill is passed in its present form, an effort would be made to reconcile the two bills. Wood does not believe the “Weinstein tax” provision would survive that reconciliation process to produce a final bill. “I’ve seen, in the last couple of decades, numerous attempts to restrict tax deductions for various kinds of damage payments,” all to no avail.
Wood mentions punitive damage payments as an example of a kind of litigation expense that has been the subject of attempts to change the law. Large oil spill cases with large punitive damage awards have triggered efforts to change the law. However, none of these efforts have succeeded, and punitive damage payments are fully deductible by businesses.
Wood says that one facet of the “Weinstein tax” worthy of note is that it applies to attorneys’ fees. This would be a big change. Even in cases where companies negotiate to pay fines, which are not deductible, the cost of the attorneys is deductible. The Senate proposal is a major change in the law, and Wood does not expect it to end up in the law.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.