Tackling Predatory Litigation Funding Act
The Tackling Predatory Litigation Funding Act creates a new tax regime aimed at private third-party funders of litigation. It imposes a tax on “qualified litigation proceeds” received by these funders (the covered party) from litigation financing agreements, at a rate equal to the highest existing marginal tax rate plus 3.8 percentage points. In addition, the bill requires a 50% withholding of the applicable tax from proceeds at the source and makes several clarifications to define who is taxed, what counts as a litigation financing agreement, and how proceeds are treated for tax purposes. The measure also excludes certain small or low-cost financing arrangements from this regime, treats litigation financing proceeds as non-capital assets and non-taxable gross income, and takes effect for tax years beginning after December 31, 2025. In short, the bill would significantly raise, at the point of receipt, the cost of funding litigation through third-party financiers and would limit or discourage predatory-style funding arrangements by taxing the profits they receive from litigation proceeds.
Key Points
- 1Establishes a new Chapter 50B (Litigation Financing) in the Internal Revenue Code. A tax is imposed for each tax year on the “qualified litigation proceeds” received by a covered party, at a rate equal to the sum of the highest rate of tax under section 1 and an additional 3.8 percentage points, with the tax collected at the entity level for pass-throughs like partnerships or S corporations.
- 2Defines who is a “covered party” and what counts as a “litigation financing agreement.” A covered party is a third party (including individuals, corporations, partnerships, or sovereign wealth funds) that funds litigation but is not an attorney. A litigation financing agreement is a written contract that provides funds to a party or law firm and creates a direct or collateralized interest in the litigation proceeds, including many forms of contracts or options; there are specific exclusions and exceptions.
- 3Establishes what counts as “qualified litigation proceeds.” These are realized gains, net income, or other profits received by a covered party from a litigation financing agreement, with anti-netting rules (they cannot be offset by ordinary or capital losses) and specific inclusions/exclusions regarding certain Sections of the tax code.
- 4Introduces a 50% withholding rule on the tax due from litigation proceeds. An “applicable person” who controls or receives the proceeds and has entered into a financing agreement must withhold 50% of the applicable percentage of payments to third parties under the agreement, with credits and liability rules for recipients and withholding agents.
- 5Provides specific clarifications and amendments related to tax treatment. This includes treating litigation financing proceeds as non-capital assets, excluding them from gross income (139J), and making clerical amendments to cross-reference the new regime (with an effective date for taxable years beginning after December 31, 2025).