Tag Archives: Tax Act

The Tax Act May Limit Resolutions of Sexual Harassment Complaints

One aspect of the new Tax Act (the Act) that has not been widely reported impacts employers that amicably resolve claims of sexual harassment. The provision denies tax deductions for any settlements, payouts, or attorneys’ fees related to sexual harassment or sexual abuse if such payments are subject to a non-disclosure or confidentiality agreement. Specifically, Section 162(q) to the Internal Revenue Code provides:

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.

The intent of this provision is to deter confidentiality provisions in settlements of harassment claims. It is unclear if this provision will actually have the desired impact. Companies may value the confidentiality provisions more than the tax deductions permitted in their absence, and thus continue to enter into confidential settlement agreements. Alternatively, this provision of the Act may end up hurting those bringing harassment claims. Alleged victims may want confidentiality provisions in order to avoid any publicity about their claims. However, by removing tax incentives for employers, an employer may reject a higher settlement amount or settlement of claims altogether.

Section 162(q) of the Act is bound to create confusion as to its applicability as it fails to define key terms. Namely, the Act fails to define “sexual harassment” or “sexual abuse,” both of which are pivotal to the application of the new provision. The Act also fails to contemplate how the provision is to be applied in settlement arrangements involving a variety of claims. Are the sex-based claims separable from a universal confidentiality covenant? Causing further confusion, the Act fails to explain what attorney’s fees are considered to be “related to such a settlement or payment.” Are these only the fees related to settlement negotiations, drafting the agreement, and execution or payment? Or does it extend to the claim’s inception and include the underlying investigation of the claims?

In light of the numerous questions raised by Section 162(q), employers should review their standard settlement agreements and practices and consider revising the breadth of any releases, nondisclosure provisions, or any representations or remedies.

This post was originally posted on the Williams Parker Labor & Employment Blog.

Ryan P. Portugal

Charitable Giving Under the New Tax Act – The Standard Deduction Bump

One of the more visible changes from the Tax Act will be the increase in the standard deduction. When completing an annual tax return, a taxpayer has the choice to either take a standard deduction or to itemize deductions. The standard deduction is a flat dollar amount which reduces your taxable income for the year, with the same standard deduction amount applying to every taxpayer who takes the standard deduction. The itemized deduction instead allows a taxpayer to deduct a number of different expenses from throughout the year, including certain medical expenses, mortgage interest, casualty and theft losses, state and local taxes paid, and charitable contributions. Whether a taxpayer uses the standard deduction or itemizes his or her deductions will depend on whether that taxpayer’s itemized deductions exceed the standard deduction amount.

In 2017, the standard deduction amount was $6,350 for single taxpayers and $12,700 for married taxpayers filing jointly. The Tax Act has nearly doubled these amounts for 2018, with the standard deduction increased to $12,000 for single taxpayers and $24,000 for married taxpayers filing jointly. Limitations have also been placed on deducting state and local taxes (capped at $10,000) and on mortgage interest (limited to new loans, capped at $750,000).

Taxpayers now have a higher standard deduction amount they need to pass before itemizing their deductions and they have more limited expenses available in order to get over that bar. Fewer people will be generating the expenses needed to make itemizing deductions worthwhile. The Tax Policy Center estimates that the percentage of taxpayers itemizing deductions will drop from 30% to only 6%.

If fewer taxpayers are itemizing their deductions, the tax benefits of charitable giving will be available to fewer taxpayers. The Tax Policy Center estimates charitable giving to drop anywhere from $12 billion to $20 billion in the next year. Taxpayers may instead bunch their charitable gifts into a single year, itemizing their deductions in such a year while using the standard deduction in subsequent years rather than spreading out these gifts over a stretch of years.

People charitably give to their favorite organizations out of a humanitarian desire to help less fortunate people and to benefit the wider community; a smaller tax incentive will not change this. But the smaller tax incentive is expected to have a negative impact both for a taxpayer’s ability to deduct charitable gifts and for the amount of gifts charitable organizations expect to receive.

Jamie E. Koepsel
(941) 552-2562

A Little Clarity for Non-U.S. Persons Selling Partnership Interests

A Spanish translation of this post appears below. La traducción al español de este artículo aparece a continuación.

The Tax Cuts and Jobs Act provided clarity to a question of how to treat gain or loss from the sale or exchange of a partnership interest held by a foreign person. The IRS, through Revenue Ruling 91-32, previously provided that “the gain realized by a foreign partner upon disposing of its interest in a U.S. partnership should be analyzed asset by asset and, to the extent any such asset would give rise to effectively connected income, the departing partner’s pro rata share of such gain should be treated as effectively connected income.” The Tax Court disagreed with the findings of Revenue Ruling 91-32 in Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner of Internal Revenue and instead held that income, gain, or loss from the sale or exchange of a U.S. partnership interest by a foreign person will only be attributable to a U.S. office, and thus taxed as effectively connected income, if the U.S. office is a material factor in the production of such income, gain, or loss in the ordinary course of business of that U.S. office.

Rather than waiting for courts to come to a consensus as to how to treat gain or loss from a foreign person’s sale of a partnership interest, the Tax Cuts and Jobs Act amended the previous tax law and took the position of Revenue Ruling 91-32. Now if a partnership has a U.S. office and a foreign person sells an interest in such a partnership, then an asset-by-asset analysis will need to be conducted to determine how much of the gain or loss from such a sale will be subject to U.S. taxes.

For more information regarding the Tax Act, please see our recent related blog posts linked below:

Jamie E. Koepsel
(941) 552-2562

Un poco de claridad para personas no estadounidenses que ofrecen a la venta su participación en una sociedad americana (también conocida como “U.S. Partnership”)

La ley de recortes fiscales y empleos de 2017, conocida como el “Tax Cuts and Jobs Act,” dió claridad a la cuestión de cómo tratar las ganancias o pérdidas de capital generadas después de la venta o intercambio de capital de una sociedad americana (“U.S. partnership”) en poder de una persona no estadounidense.

El IRS (Servicio de Impuestos Internos), a través de la Resolución de Impuestos 91-32, sostenía que las ganancias generadas por un socio extranjero al vender o transferir su parte en una sociedad americana debían ser analizadas activo por activo y, en la medida en que las ganancias de cualquier activo estuviesen vinculadas a una actividad realizada en los Estados Unidos, las ganancias de dicho socio (medidas en proporción a su participación en la sociedad) debían ser tratadas como ingresos efectivamente vinculados a una actividad realizada en los Estados Unidos.

El tribunal de impuestos no estuvo de acuerdo con la forma en que la Resolución de Impuestos 91-32 fue interpretada en el caso de Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner of Internal Revenue. El tribunal sostuvo que los ingresos, ganancias, o pérdidas generadas en la venta o intercambio de la participación de una sociedad americana por una persona extranjera debían ser atribuibles solamente a una oficina ubicada en los Estados Unidos y ser tratadas como ingresos efectivamente vinculados, solamente si la oficina ubicada en los Estados Unidos era indispensable para la producción de dichos ingresos, ganancias, o pérdidas en el curso ordinario de los negocios de la oficina ubicada en los Estados Unidos.

En lugar de esperar a que los tribunales llegaran a un consenso en cuanto a cómo tratar las ganancias o pérdidas generadas en la venta de capital de una sociedad en propiedad de una persona extranjera, la reforma fiscal de 2017 modificó la ley tributaria anterior y asumió la regla establecida por la Resolución de Impuestos 91-32. Ahora, si una sociedad tiene una oficina ubicada en los Estados Unidos y una persona extranjera vende su participación en tal sociedad, un análisis de cada activo debe ser conducido para determinar el monto de las ganancias o pérdidas sujetas a impuestos en los Estados Unidos.

Traducción por Juliana Ferro, Abogada