HR3512-119

What This Bill Does

The Tackling Predatory Litigation Funding Act adds a new subtitle D chapter to the Internal Revenue Code for litigation financing. A covered party must pay tax each taxable year equal to the applicable percentage of qualified litigation proceeds it receives. The applicable percentage is the highest section 1 individual tax rate plus 3.8 percentage points. If the covered party is a partnership, S corporation, or other pass-through entity, the tax is imposed at the entity level. A covered party is a third party to a civil action, including an individual, corporation, partnership, or sovereign wealth fund, that receives funds under a litigation financing agreement and is not an attorney representing a party. Litigation financing agreements are written agreements funding a named party or affiliated law firm in exchange for an interest in settlement, verdict, judgment, or other proceeds. Persons with control, receipt, or custody of proceeds from a civil action who entered a litigation financing agreement must deduct and withhold tax equal to 50 percent of the applicable percentage of payments required to be made to the third-party funder. The bill also creates section 139J excluding qualified litigation proceeds from gross income.

Who Benefits and How

Federal taxpayers benefit from a new tax stream on third-party litigation funding proceeds. Civil defendants may benefit if higher taxes reduce the expected return from financing lawsuits. Internal Revenue Service enforcement staff gain explicit statutory hooks for taxing and withholding litigation-finance proceeds. Civil defendants and business defendants may benefit if higher taxes reduce the expected return from financing lawsuits.

Who Bears the Burden and How

Third-party investment funds that finance litigation face a new tax at the top individual rate plus 3.8 percentage points on qualified proceeds. Sovereign wealth funds financing U.S. litigation are included as covered parties regardless of place of organization. Trial law firms with control of proceeds must withhold and remit tax on payments to funders. Pass-through litigation funders face entity-level taxation rather than owner-level only treatment.

Key Provisions

• Imposes a tax on covered third-party litigation funders receiving qualified litigation proceeds.
• Sets the tax rate at the highest individual rate plus 3.8 percentage points.
• Applies the tax at the entity level for partnerships, S corporations, and other pass-through entities.
• Requires withholding from civil-action proceeds paid to litigation funders.
• Covers foreign and domestic third-party funders, including sovereign wealth funds.
• Creates section 139J excluding qualified litigation proceeds from gross income.