Why the Tax Cuts and Jobs Act May Not Always Help Sexual Harassment Victims

Whitman Legal Solutions, LLC

Whitman Legal Solutions, LLC

Suppose you are a professional cellist in your 40’s. Over nearly two decades, you have worked your way to first chair of a well-known orchestra, but like most professional orchestras, it’s still a part-time job, and money is tight.

Then, disaster hits – you learn that you have developed tendonitis in your hand, a problem which has ended many a string player’s careers.  You quietly seek out medical treatment and medication, maybe even narcotics which dull the pain but prevent you from feeling the warning signs that you should slow down to prevent further injury. It seems worth it so you can keep performing.

Despite your efforts, apparently your tendonitis, and its impact on your playing, has not gone unnoticed. The orchestra conductor, a handsome, gentile, and respected musician in his 60’s whose professional reach is national if not international, says he has noticed your struggle and wants to help. This could be the boost you need; he is wealthy and has a history of mentoring female musicians and boosting their careers. Maybe he can arrange for you to see a specialist physician and help you to afford it.

He suggests you meet in his office after the rehearsal. When you arrive, the conductor motions for you to sit down on the sofa in his office.  Standing, says he admires you as a musician and that he sees your struggle and he wants things to work out for you. Then, he sits down next to you.  He strokes your hair and comments that he has always found you attractive.  You are already in a relationship and not interested in looking elsewhere.  Plus, the conductor is married. You like his wife and know she doesn’t deserve his disloyalty.

On the other hand, he is respected and influential in the music world and could ruin your career if you turn him down. Now that you think about it, rumor has it that after a violinist turned down his advances, he told his colleagues not to hire her, and she now is waiting tables to support herself.

Fans of “Mozart in the Jungle,” an Amazon original television series, might recognize this as one of many possible unwritten, back stories about the start of the intimate relationship between Cynthia and Thomas. 

In the television show, the relationship is portrayed as consensual, with no back story given.  Yet, over and over in the news we also have seen similar stories, where influential people are accused of using their power, authority, and prestige to put sexual pressure (or worse) on less-established individuals trying to climb up the career ladder. 

Recently there has been public outrage over learning that a number of powerful individuals and institutions repeatedly had entered into confidential settlements of sexual harassment and sexual abuse claims (I’ll call both sexual harassment for the remainder of this blog), only to have the perpetrators move on to victimize others – sometimes dozens or even hundreds of others.  When reports came out that those “hush-money” settlements were tax deductible, there was a demand for action to stop what was seen as an effective public subsidy these settlements via tax savings.  

With tax reform already on the table, Congress responded by adding Section 162(q) of the tax code. Section 162(q) prohibits taxpayers from deducting as business expenses any payments or settlements or attorney fees related to sexual harassment or sexual abuse if the settlement or payment is subject to a nondisclosure agreement (NDA).

Many have praised Section 162(q) as a progressive approach to reducing the financial incentive for “hush money,” reasoning that this will draw predators into the public eye and hopefully, stop their pattern of sexual harassment. Publicizing sexual harassment settlements may also increase both the financial and reputational cost for those engaging in sexual harassment and sexual abuse, which in turn, may deter repeat behavior.

Although no one questions the importance of eliminating sexual harassment, some have expressed concerns that Section 162(q) might hurt victims of sexual harassment. If settlements are made public, parties to settlement agreements or others bringing attention to the accused also might publicize the victim’s, as well as the perpetrator’s name, thereby publicizing traumatic experiences that some victims would prefer to keep private.

Section 162(q) also may reduce the dollar amount of sexual harassment settlements. Under Section 162(q), victims who desire a NDA to maintain their privacy might be forced to accept a lower settlement amount to offset the additional “cost” in taxes to the accused or his/her employer.  Likewise, those accused of sexual harassment who want the privacy a NDA affords might offer to pay a smaller settlement to the victim if the payment is not tax deductible. 

Further, Section 162(q) may require that victims who want an NDA so that their ordeal remains private pay more in taxes on settlements, because they in turn are not able to deduct attorney fees (which can be 33% or more of the settlement amount) and would be forced to pay taxes on money they never receive.[1]

Back to the cellist. Suppose that we are back in 2017.  The cellist reports him to the orchestra board, but because the orchestra is in the middle of a huge capital campaign, the board doesn’t want the publicity of firing the conductor and doesn’t want the claim to be made public. Therefore, the board offers to pay the cellist a $250,000 settlement and will use the board’s resources to find her another principal cellist job if she will resign from the orchestra and sign a release and mutual NDA.

The cellist could view the settlement offer as favorable to her. Perhaps, $250,000 would pay her therapist’s bill and cover treatment for her tendonitis that her insurance will not cover. There might even be money left over for a Sartory[2] cello bow she had been eyeing.  A move to an orchestra as principal cellist might boost her career, particularly if she there were an NDA that assured that her history of tendonitis would not be disclosed and taint her reputation. Although she might want the conductor’s behavior to be publicized as a warning to other musicians, she might not want his wife to suffer humiliation along with him.

With a nonprofit orchestra, the situation may be no different under Section 162(q). If the orchestra doesn’t pay taxes, then it should not be concerned about whether it can deduct the settlement.[3]  Let’s assume, however, that it is 2018 and the orchestra makes the same offer $250,000 to the cellist, but without the NDA because it is a rare “for-profit” orchestra.

The cellist accepts the settlement, uses it to undergo counseling and quietly receive treatment for her tendonitis (which fortunately is fully healed as a result), and she buys the Sartory bow.  

All of us would like to imagine an outcome where the cellist emerges from counseling, strong and brave, to share her story and encourage other victims to come forward. She appears on talk shows as an image of the strong woman, and, in the process, several additional victims are inspired to come forward with accusations of their own. In this outcome, the harasser ends up in shame, his wife divorces him, and the victims end up victorious, admired for their heroism.

Yet, without an NDA, that isn’t the only possible outcome.  As we look at Section 162(q), it is important to remember that victims have always had the right to make their accusations public and to have their case heard in a Court.  Yet many have chosen not to do so for one reason or another.

Imagine that our victim is a private person and after counseling, she decides that the best thing for her is to move on with her life and perform on her cello.  Then, one day when she reports for rehearsal at her new orchestra, everyone stares at her oddly. Her stand partner tells her in that morning’s newspaper, there is an expose about a pattern of sexual harassment by the conductor of her former orchestra. The reporter has spoken with a source “close to her former orchestra,” and the cellist’s name is mentioned as having received a large settlement. In response, the conductor protests his innocence, claiming he did the cellist a favor by overlooking her unreliable performance due to an “ongoing tendonitis problem.”

Overnight, several of the cellists’ regular free-lance gig sources stop calling her. At next year’s auditions, the cellist is moved to fourth chair of her new orchestra, a pay cut. Two years later, she has sold her Sartory bow and finds herself out of the orchestra entirely, waiting tables to make ends meet.  If there had been an NDA, she could have sued the conductor and orchestra for breach of the NDA, but since there is no NDA, and the cellist did experience tendonitis, she likely has no legal remedy.

Unquestionably, there is a public interest in eliminating sexual harassment from our society. Although Section 162(q) might move this process forward, it is far from clear or perfect.  For victims who find healing by testifying in Court against their abuser (as more than 150 women did in Michigan in January), Section 162(q) is a step in the right direction. 

However, Section 162(q) may make things more difficult for those equally brave victims who stand up against their harasser by reporting sexual harassment, but who prefer personal healing outside of the public eye.[4]  Plus, Section 162(q) has no impact on settlements by non-profits, including certain educational institutions, which do not pay taxes and may increase taxes on settlements for some victims who hire attorneys to help them pursue justice.

[1] Taxation of settlements for sexual harassment can be complicated and is beyond the scope of this blog post. Although it is too early for IRS guidance interpreting Section 162(q), it is likely that to the extent a settlement is not taxed to begin with, Section 162(q) would not impact it. However, for a settlement that is taxable if it, for instance, is characterized as compensation for lost wages or income, then it would seem that the attorney fees for obtaining the settlement would not be deductible by the victim.

[2]  MUSIC GEEK NOTE: Eugene Sartory was a famous 20th century archetier (bowmaker). His gift for bow making revealed itself when he was in still his teens, and he opened his first workshop when he was just 18 years old, after only a few years of apprenticeship. Unlike some of the old master luthier, Sartory bows, while pricey, are not rare.  They typically will sell somewhere in the five-figure range, with the highest reported auction price being just over $85,000 for a cello bow.

[3]  This also would apply to any settling party that does not pay taxes, including, for instance, some religious and educational institutions, some of which have been accused of ignoring sexual harassment and abuse for years or even decades.

[4]  For example, based upon recent news reports, there were more than 250 reports of abuse in the Michigan case, but about 100 of the victims, for one reason or another, did not testify, so most of their identities remain private.

This series draws from Elizabeth Whitman’s background in and passion for classical music to illustrate creative solutions for legal challenges experienced by businesses and real estate investors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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