Tax Reform Changes for Sexual Harassment Settlements May Bring Harassers Out of the Shadows, But May Not Help Victims

By Elizabeth A. Whitman

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.

© 2018 by Elizabeth A. Whitman

For more information, please contact Elizabeth A. Whitman at (301) 664-7713 or

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC or any of its attorneys.

A String Quartet, a Nothing Special Diner, and a Famous Chef Diner Take a Random Walk Through the New Section 199A Pass-Through Deduction

By Elizabeth A. Whitman

Recently, some friends and I formed a string quartet. We all have full-time day jobs, and we don’t expect for the quartet to be a source of income. However, let’s imagine for a moment that our string quartet (which we can refer to as the TCJA Quartet[1]) is asked to provide chamber music for a community event.  We set an open instrument case in front of the group.  As we perform, people drop bills into the case, and at the end of the evening, we are surprised to see that we have collected $100.

What should we do with the $100? Well, the TCJA Quartet hasn’t formed an official legal entity such as a corporation or limited liability company and it doesn’t have a bank account or any expenses. It seems like the best thing to do is just to split the money four ways so each of us receives $25.

The TCJA Quartet is a lot like a “pass-through” under new Section 199A of the Tax Cuts and Jobs Act (the “2017 Tax Law”). Under this law, a “pass-through entity” is any entity which is not taxed as a corporation.  Under the simplest reading of the law, this means that any individual or entity which reports income on Schedule C of Form 1040 (individual tax return) or on Form 1065 (for partnerships and trusts) or Form 1120S (for S corporations) can be a pass-through entity under Section 199A.  What these “pass-throughs” have in common is that they involve business income, but the business itself “passes through” items of income and expense to the business’s owners.[2]

Under Section 199A, it is good to be a “pass-through,” because taxpayers may deduct the twenty percent (20%) of their “qualified business income” (roughly equal to net income) from pass-throughs when computing their tax obligation, provided the taxpayer’s taxable income does not exceed a “threshold amount” of $157,500 ($315,00 for a joint return).

For taxpayer’s whose income exceeds the threshold amount, there is a phase-out period of $50,000 ($100,000 for a joint return), after which the pass-through deduction is the lesser of 20% of qualified business income or the greater of either 1) 50% of the pass-through’s W-2 wages or 2) 25% of W-2 wages plus 25% of the unadjusted basis of “qualified property” immediately after acquisition (roughly equal to the acquisition cost for depreciable property owned by the pass-through).

In case you are not already confused, not all pass-throughs are treated the same under Section 199A. Specifically, pass-throughs which are a “specified service trade or business” completely lose the deduction after the $50,000 (or $100,000) phase-out period.

This limitation for pass-throughs which are a “specified service trade or business” has been widely touted as preventing higher income attorneys, accountants, real estate brokerage, and financial advisors from benefiting from the deduction, but it excludes taxpayers in other fields, as well. Specifically, a pass-through is a “specified service trade or business” if it is engaged in the provision of services in health, law, accounting, performing arts, consulting, athletics, financial services, and brokerages services, or “where the principal asset [of the pass-through] is the reputation or skill of 1 or more of its employees or owners.”

As a result, a pass-through which is, the Nothing Special Diner which is owned and operated by a local family and serves unmemorable omelets, meatloaf, and macaroni and cheese using recipes from a collection of church cookbooks might not see a complete phase-out of its deduction. However, the nearby Famous Chef Diner selling the same menu items, but which is owned by a celebrity chef who lends his/her name to the restaurant and helps formulate recipes might see a phase-out of its deduction. After all, the skill or reputation of the celebrity chef, which is the primary asset or at least a major asset for the Famous Chef Diner, but the Nothing Special Diner does not appear claim the reputation or skill of is owners or employees as a major asset.

Perhaps more paradoxically, a corner bodega owned by local family, which sells fresh-cut flowers might not see a complete phase-out of its pass-through deduction, but a family florist business of no particular fame, which sells floral designs with the same type of flowers, might be subject to the phase-out. That is because the floral design skill of the owners and employees of the florist business might be considered to be the principal asset of that business.

Going back to the TCJA Quartet, even though we aren’t quite ready for our Carnegie Hall debut, because we are providing services in “performing arts,” we likely would be considered a “specified service trade or business,” which would be subject to potential phase-out of the deduction, provided our income from our day jobs exceeded the threshold amount plus the $50,000/$100,000 phase-out amount. We would be subject to this phase-out based upon income, even if we remained unknown.

The phase-out also would apply to any US income of The Really Terrible Orchestra[3] (yes, it really exists), an amateur orchestra which prides itself in its mediocrity, but which now travels and the members of which possibly, might have significant income as a result. The same phase-out potentially could be applied to a pass-through providing piano lessons, soccer coaching, or home health services, but paradoxically not to pass-throughs providing painting lessons, math team coaching, or babysitting services.

Section 199A is nine-pages long and contains cross references to existing Internal Revenue Code sections, some of which are better “fits” into the concepts in Section 199A than others. The IRS has not, to date, issued any guidance on how it expects to interpret any part of Section 199A, and it’s a fair guess that it likely will be well over a year (and probably longer) before the IRS is able to complete the regulatory process to give clarity on exactly how Section 199A will work for specific taxpayer situations.

Until then, taxpayers may be able to maximize the likelihood that they will benefit from the pass-through deduction by doing the following:

  1. Confirm that they have a business structured as a pass-through. Although it seems clear that taxpayers filing corporate tax returns on Form 1020 and individuals whose only income is W-2 wages do not qualify as pass-throughs, it is not as clear whether an individual who is what some call a 1099 employee [4] will be able to take the pass-through deduction. The safest course of action for individuals is to consider operating under a true “pass-through,” such as an S corporation or limited liability company. [5]
  2. Take opportunities of retirement savings and other “above the line” deductions, which reduce taxable income. To avoid the phase-out of the pass-through deduction, taxpayers whose business might be considered a “specified service business” will benefit by keeping their taxable income as low as possible. At this time, it appears that pre-tax deposits into retirement funds and other “above the line” deductions may help those taxpayers keep their income below the threshold amounts for the phase-out. Even taxpayers who are not in a “specified service business” may benefit from this strategy so that they are assured of having the flat 20% deduction available to them, rather than having to compute and compare W-2 wages and qualified property.
  3. Do a quarterly review of their tax situations. All taxpayers should, on a quarterly basis, look at their anticipated taxable income and deductions and try to fine-tune their withholding or make quarterly payments if necessary to assure they are making appropriate tax payments. Taxpayers who might be eligible for the pass-through deduction additionally should evaluate what business expenses, retirement account deposits, and other strategies might be appropriate to maximize the likelihood they will be eligible for the deduction at the end of the year.

As for the TCJA Quartet example, each of us will have a huge $25 income for our efforts. Assuming the TCJA Quartet is a “trade or business,” it would be considered a special services business due to our performing arts focus. It is possible, however, that the four of us would each receive different tax treatment of our $25.

If, for example, the first violinist was single and had taxable income of $100,000, she could deduct the full 20% (or $5) under the pass-through deduction, so she would pay taxes on only $20 of her quartet income. On the other hand, if the second violinist filed a joint return and together with her spouse had taxable income of $365,000, then she would be subject to a partial phase-out of the pass-through deduction (50% reduction to be exact), so her pass-through deduction would be only $2.50, and she would pay taxes on $22.50 of her quartet income. If the cellist also filed a joint tax return and she and her spouse have taxable income of $420,000, above the phase-out period; she would pay taxes on the entire $25.00 of her quartet income.  And as for the violist, I’ll be polite and save the viola joke for a later article.


[1]  Named after the newly-passed Tax Cuts and Jobs Act

[2]  Insert explanation of why sole proprietorship wasn’t traditionally a pass-through, and why a SMLLC is disregarded entity.


[4]  An individual who works as an independent contractor form whom form W-2 need not be filed but who also is not considered to be engaged in a trade or business, if such an individual can exist.

[5] Noting that single member limited liability companies are disregarded entities under the tax law, but like multi-member limited liability companies, do not pay their own taxes, but instead, taxes are paid by the owners of the limited liability company.  Limited liability companies can elect to be taxes as an S corporation, but that election is subject to strict time deadlines.

© 2018 by Elizabeth A. Whitman

For more information, please contact Elizabeth A. Whitman at (301) 664-7713 or

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC or any of its attorneys.