Tax-Law Typo Risks Bankrupting #MeToo Victims Without GOP Fix

(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 Donald Trump’s tax overhaul eliminates the deduction companies used to be able to take when they settled sexual harassment cases and included non-disclosure agreements, which generally keep details secret as a condition of the payout. A misplaced word by Republican tax writers may mean that victims of accused sexual predators like Hollywood producer Harvey Weinstein 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 so-called 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.

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 formal 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 Senator Bob Menendez, a New Jersey Democrat, to help make the use of NDAs less attractive following a flurry of sexual misconduct allegations.

The backlash against NDAs has been fueled by examples such as Weinstein and former Fox News anchor Bill O’Reilly where the contracts helped hide ongoing harassment. Alaska, California, 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 leaders, mostly men, have been accused of sexual harassment or other improper behavior related to the so-called #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 doesn’t include actions taken that weren’t made public, according to Temin.

The original provision made clear that the deduction change only applied to the company, not 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.

Senate Finance Chairman Orrin Hatch, a Utah Republican, is continuing to meet with 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’ write offs 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. The 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.

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, she 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, New York. 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 the high salaries paid to chief executive officers, 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 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 non-disclosure 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, Michigan, 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.”

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