U.S. Treasury Department in Washington. Credit: Mike Scarcella/ALM

The tax proposal on Capitol Hill takes aim at the recent wave of workplace scandals with a provision that would prevent businesses from deducting settlements, payouts and legal fees related to sexual harassment or abuse allegations that are part of any nondisclosure agreement.

Such payments are deductible under current tax law. The proposal would make it more expensive for an employer to use a settlement, which could be written off as a business expense, as a way to address a sexual harassment or abuse case. Such settlements came under the spotlight amid high-profile cases of harassment, including Fox News host Bill O'Reilly and Hollywood producer Harvey Weinstein.

The amendment, filed by Sen. Robert Menendez, D-New Jersey, is part of a response from legislators to sexual harassment stories that have exposed powerful men and made companies rethink their policies to prevent such misconduct.

Brew a Pot of Coffee, This Big Law Tax Attorney Is Burning the Midnight Oil

The U.S. House was set to vote Wednesday after Senate action earlier in the day. The Senate version still included the provision ending deductions for sexual harassment settlements and legal fees.

Companies are reconsidering with their own policies to address the rise in accusations. The U.S. Equal Employment Opportunity Commission is issuing new sexual harassment guidelines for the first time in two decades. Federal and state legislation has been proposed.

“I think most Americans would be outraged to know that they are subsidizing sexual predators in the tax code,” Menendez told The New York Times.

Microsoft Corp. this week came out in favor of a federal bill that would void predispute arbitration agreements regarding sexual harassment. It also changed its own policy—to waive such agreements. Microsoft's maneuvering was an indication that companies large and small are facing a reckoning.

Some attorneys have warned that companies and legislators should not be so reactive in the face of the scandals. The provision in the tax bill that tackles sexual harassment made the final cut when the House and Senate blended their tax bills together, but there could be a potential consequence for the victims of abuse, as well, in the final version.

The tax provision could actually be harmful to victims, Anthony Infanti, law professor at the University of Pittsburgh School of Law, wrote in an opinion piece in the Hill. He said that, for tax purposes, a victim is required to report the full amount of a settlement as income—even what is paid to attorneys—but that amount is currently allowed as a deduction. That deduction would no longer be legal under the new provision of the tax bill, Infanti suggests.

“Surely, few would object to creating a tax disincentive that deters perpetrators or their employers from covering up sexual harassment or abuse by trying to keep victims quiet. But that is not all the tax bill does,” Infanti wrote. “The bill targets victims, too.”

Infanti noted that members of Congress have used the federal Treasury to pay for sexual harassment settlements and would not be affected by the provision.

A spokesman for Menendez's office said Wednesday that the provision added into the tax bill amends a portion of tax code dealing with trade and business expenses, so it would not have any impact on individual tax filers.

Read more: