Tax Loophole Could Target Victims Of Sexual Misconduct, Says Pitt Law Professor
Many observers have found loopholes in the Republican tax bill passed by the Senate and House late Tuesday and into early Wednesday. Some provisions were even found to violate budget rules and were changed last minute. University of Pittsburgh law professor Tony Infanti found that one loophole could also leave targets of sexual misconduct vulnerable. Infanti discussed the provision with 90.5 WESA's An-Li Herring.
This conversation has been edited for length and clarity.
AN-LI HERRING: There's a provision in the tax bill that says people can't take deductions on payments that are part of a sexual harassment or abuse settlement if that settlement is subject to a nondisclosure agreement. This provision ostensibly is meant to discourage these agreements, which keep settlements confidential and are viewed as contributing to the secrecy that often surrounds cases involving sexual harassment and abuse. So why is it a problem?
TONY INFANTI: Well, the problem seems to stem from the fact that that provision was written in haste, along with most of the rest of the tax bill. So, it wasn't really well thought out. The way that the provision is drafted, it doesn't make any mention of the identity of the taxpayer. It doesn't talk about people who are accused of sexual harassment or sexual abuse or who employ people that do that. It just says no deduction shall be allowed. So that, because it's so broadly written, would cover both the victims, the employers and the perpetrators themselves.
And people think about just the perpetrators having deductions because they're paying the settlement. The problem is that the victim, when they get the settlement amount, the amount of the settlement will often be included in their income, and they'll have to pay tax on it. So, it doesn't just target the perpetrators and their employers that are trying to cover things up, it also is going to get to victims who might have very legitimate privacy reasons for not wanting to have an allegation about sexual harassment or sexual abuse disclosed publicly.
HERRING: What would some of those reasons be?
INFANTI: Well, some of the reasons why they might not want to have it publicly disclosed would be if you have somebody who's involved in a case with somebody who's well-known, they may not want to be hounded by the press. They may worry about effects on their ability to get a job or make a living in the future if this type of thing is disclosed. And so they might have some legitimate reasons that should be taken into account in determining whether or not there's a nondisclosure agreement.
HERRING: How would such a loophole make it into the tax bill?
INFANTI: Well, I mean it seems that they put this in the tax bill to address the ongoing sexual harassment scandals in Congress and in corporate America. The problem is that, as I said, it's not hardly well thought out. They didn't really spend a lot of time, it seems, thinking through how to draft this provision. And it seems they also didn't really give any thought because there were no hearings about this, or about really anything in the tax bill, you know, looking for expert-type advice about whether this tax system is really the appropriate way to go after this issue.
The other basic problem with this is that it's not even going to hit some of the highest-profile scandals. There's no penalty for the perpetrator when you're talking about congressmen using the public treasury to pay out settlements because, there, it's not the congressman who's making the payment. It's the U.S. government. The U.S. government's not an income taxpayer. They don't have to file a tax return at the end of the year. So, this provision would do nothing to deter nondisclosure agreements in Congress.
When you're talk about tax-exempt entities, there's been lots of allegations against the Catholic church with respect to sexual abuse, which is also covered by this provision. The Catholic church is a tax-exempt entity. They don't really care about these deductions either.
So, this provision would do really nothing to deter non-disclosure agreements in those settlements either. So, that's in part why looking outside the tax system might be an answer instead of always looking to tax to provide the answer.
HERRING: In recent weeks, people have been discovering a variety of loopholes in this tax bill. I'm wondering - why hasn't this one gotten more attention?
INFANTI: I think that's a really good question. I'm actually surprised that it hasn't gotten more attention because it really brings together two issues that are in the news. I mean sexual harassment scandals, that's been in the news for months now. And, the tax bill has been in the news for months now. But this is tucked away, buried in a very very long bill, and I just think it's escaped notice.
HERRING: How did you discover it?
INFANTI: Well, I found it because I was teaching a seminar this fall, and at the end of the seminar, I asked the students to take a look at the tax reform bills that were going through Congress and pick one or two provisions that they wanted to focus on and tease out some of the implications of the provisions.
I had gone through the bill, and I identified things that I thought were interesting, and I found this [provision] among them. And one of my students also picked this provision as the one that he wanted to focus on. And so, we spent some time in class discussing it and teasing it out, and that got me thinking about it further.
HERRING: It's assumed that this bill will be passed into law very soon. What would it take to fix this kind of loophole?
INFANTI: Well, once it's passed into law, they would have to go back in and amend the legislation. It's not the kind of thing that I could see the Treasury Department trying to fix just through regulations, the IRS trying to just fix through regulations, because the plain text of the statute is really really broad. I think it would take another act of Congress to fix this.
HERRING: So, you've hit on a way in which this revision could, in some cases, directly contradict what seems to be the goal here. Are there any other unforeseen consequences?
INFANTI: Yes, there's another problem with the way that the provision's been drafted, and drafted so broadly. It doesn't just target the settlements but it can also target any payment that's related to sexual harassment that's subject to a nondisclosure agreement or sexual abuse that's subject to a nondisclosure agreement.
And the way that the provision is drafted, it doesn't just apply to your ordinary and necessary business expenses. It applies to any deduction under the income tax, which is very different from the way that these provisions are usually drafted and have been drafted in the past. They're usually cabined in a lot more. And with that being so broadly drafted, it could disallow all sorts of potential other deductions for a victim.
One thing that comes to mind is, if you have a victim who, years after the settlement is over and done, the victim is still getting, say, mental health care, going to a psychologist, a psychiatrist to deal with the sexual harassment, to deal with the abuse - it's possible to read this bill as disallowing the medical expense deduction for seeing the psychiatrist or the psychologist if that sexual harassment is subject to a nondisclosure agreement.
HERRING: Have you seen other instances like this where it just seems to be such a gaping loophole, just in all your years studying the tax code and teaching tax law?
INFANTI: Well, of course there's plenty of loopholes. I mean it's hard to think of one that is just this poorly drafted. I mean there's always holes in any provision. No one can draft an airtight provision, only because it's usually pretty impossible to think of every potential circumstance that can possibly come up with different people. There's always going to be something new or different that comes up after the fact that people didn't anticipate or even couldn't anticipate.
But, [the questions I'm raising] are all questions that pretty easily could be anticipated if they just had a hearing and had some experts come forward and give them some feedback on how provisions work. I mean this has just been so hastily done. I mean when they try to compare this to 1986, that tax reform effort lasted for years. It started for years before the final bill was passed in 1986.
This has just been so rushed, with really no public input and no input from experts, that it's really disconcerting and disheartening that this is the way that they're crafting tax legislation now.
And there was one other thing that I just wanted to point out, too, in terms of in-artful drafting and creating possible problems, [and that's] the effective date. So, there's the provision that allows the disallowance [of deductions for sexual misconduct settlements involving nondisclosure agreements], but then Congress always has to decide - well when is this going to go into effect? What payments are going to get hit by this? Is it just going to be payments with respect to settlements that are entered into after the agreement, before the agreement?
Well, the way they have it drafted is that it's going to hit any payments or settlements that are made after the tax bill is passed into law, even if the settlement and nondisclosure agreement were entered into years before. And that creates potential problems for victims because you might have a situation that you think is long behind you and now potentially are going to have the perpetrator or the employer of the perpetrator or the person you entered into the nondisclosure agreement with, coming back to you and asking to maybe rescind a nondisclosure agreement, to try to open the door to once again be able to deduct the settlement payments that may be ongoing or other payments with respect to it that are ongoing and now would be disallowed.
So then you're making people who thought that this disturbing episode in their life was behind them, [they're] now going to have to revisit it because Congress has an effective date that's going to capture any payment that comes after the bill's passed into law, probably sometime this week.