Abstract
The 2017 Tax Act was the most sweeping federal tax legislation in over a generation. While many of its reforms, from dramatically lowering the corporate tax rate to altering the international tax rules, have already received significant attention, comparatively little attention has been paid to the 2017 Tax Act’s effects on personal injury plaintiffs. This Article explores those impacts.
 The 2017 Tax Act added a new provision that indirectly affects plaintiffs who allege sexual harassment or abuse. The new provision disallows the defendants’ deductions if the parties enter into a nondisclosure agreement. While targeted at defendants, the provision likely unwittingly harms plaintiffs by reducing settlement offers. The provision also suffers from a host of ambiguities that the Treasury Department and Internal Revenue Service will need to resolve.
 The 2017 Tax Act also eliminated so-called miscellaneous itemized deductions. In certain types of personal injury claims, such as defamation or emotional distress, this development causes the plaintiff to be taxed on the full settlement amount even if, as is often the case, one-third or more of the settlement is paid as a contingent fee to the plaintiff’s attorney. Legislative or administrative action is required to remedy this patent unfairness.
Highlights
The federal income tax legislation signed into law on December 17, 2017 (2017 Tax Act) was the most sweeping federal tax reform legislation in over thirty years, with an estimated cost of $1.5 trillion over the ten-year budget window.[1]
Because the provision operates as a tax on the “sale” of an nondisclosure agreement (NDA) by plaintiffs to defendants and because some portion of that tax burden will likely be shifted to plaintiffs in the form of lower settlement offers, victims of sexual harassment or abuse will bear at least some brunt of the costs imposed under section 162(q).[4]
The government will eventually issue guidance fleshing out the rule, but until defendants and the Internal Revenue Service (IRS) will have to work with the bare-bones statutory provision, which reads in its entirety as follows: “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.”[23]
Summary
The federal income tax legislation signed into law on December 17, 2017 (2017 Tax Act) was the most sweeping federal tax reform legislation in over thirty years, with an estimated cost of $1.5 trillion over the ten-year budget window.[1]. 2 While these and other headline reforms have garnered substantial attention, additional changes have remained largely unexplored, even though they may significantly affect narrow classes of taxpayers This Article addresses the impact of the 2017 Tax Act on one of those narrow classes: certain plaintiffs in personal injury litigation. As part of the 2017 Tax Act, Congress enacted section 162(q): a new deduction disallowance provision responding to social concerns arising out of the allegations against Harvey Weinstein and the related “Me Too” movement.[6] Section 162(q)(1) denies a taxpayer’s deduction for “any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement.”[7] Section 162(q)(2) goes on to deny deductions for the payor’s attorney’s fees related to such a settlement or payment.[8] Prior to the enactment of section 162(q), payments or settlements of legal claims by businesses and any related legal fees would generally be deductible, regardless of the nature of the underlying claim or whether the payments were subject to an NDA.[9]
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