Current Federal Tax Developments

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Recipients of Sexual Harassment Settlements Will Be Allowed to Deduct Legal Fees Even if Confidentiality Clause is in the Agreement

The IRS has published on their website a frequently asked question page dealing with a deduction for legal fees under IRC §162(q) (Section 162(q) FAQ).

For those who may not have memorized the Internal Revenue Code, IRC §162(q) is a provision added by the Tax Cuts and Jobs Act.  This provision 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.

A concern raised after the passage of the Tax Cuts and Jobs Act was that the provision appeared to prevent a deduction for legal fees regardless of whether the party was the one paying a settlement or the party receiving the settlement.

The IRS has posted a notice on the website clarifying that the agency believes the rules are different for the party that is receiving the payment.  The FAQ on the website states:

Question:

Does section 162(q) preclude me from deducting my attorney’s fees related to the settlement of my sexual harassment claim if the settlement is subject to a nondisclosure agreement?

Answer:

No, recipients of settlements or payments related to sexual harassment or sexual abuse, whose settlement or payment is subject to a nondisclosure agreement, are not precluded by section 162(q) from deducting attorney’s fees related to the settlement or payment, if otherwise deductible.  See Publication 525, Taxable and Nontaxable Income, for additional information on when all or a portion of attorney’s fees may be deductible.