Tackling Predatory Litigation Funding Act
- Bill Number
- H.R. 3512
- Origin Chamber
- House
- Congress
- 119th Congress, Session 1
- Policy Area
- Taxation
- Status
- Introduced
- Latest Action
- 2025-05-20: Referred to the House Committee on Ways and Means.
- Last Updated
- 2026-07-01T08:08:21Z
AI-Generated Summary
Purpose of the Legislation
The Tackling Predatory Litigation Funding Act (H.R. 3512) aims to regulate third-party financing of lawsuits by imposing a specific tax on profits earned by non-attorney funders from litigation outcomes. It seeks to address concerns about "predatory" funding practices where external investors provide money for civil cases in exchange for a share of any settlement or judgment, treating such income as taxable in a targeted way.
Key Provisions
- Imposition of Tax (Section 5000E-1): A new tax is applied to "qualified litigation proceeds" (profits or gains from funding agreements) received by "covered parties" (third-party funders, such as individuals, corporations, partnerships, or foreign sovereign wealth funds). The tax rate equals the highest individual income tax rate for that year plus an additional 3.8 percentage points. For pass-through entities (like partnerships or S corporations), the tax is paid at the entity level.
- Definitions (Section 5000E-2):
- Civil action: Broadly includes any lawsuit, administrative proceeding, claim, or similar legal matter (can cover multiple related actions).
- Covered party: Any third-party funder (not an attorney) that receives funds under a litigation financing agreement, regardless of whether the funder is U.S.-based or foreign.
- Litigation financing agreement: A written deal where a third party provides money to a party in the case or their law firm, in exchange for a direct or indirect interest in the case's proceeds (e.g., settlement or judgment). This includes similar contracts like options or swaps. Exceptions apply to:
- Agreements funding less than $10,000 for a single case.
- Loans limited to principal repayment, plus interest not exceeding the greater of 7% or twice the average yield on 30-year U.S. Treasury bonds (from the prior year), or reimbursements for attorney fees.
- Agreements with close relatives or related entities of the party receiving funds (as defined under existing tax rules for related parties).
- Qualified litigation proceeds: Profits, gains, or net income from these agreements. Losses cannot offset these amounts (anti-netting rule), and certain exclusions (e.g., for personal injury awards or foreign government income) do not apply.
- Special Rules (Section 5000E-3):
- Withholding requirement: Parties to the case or affiliated law firms must withhold tax (at 50% of the full applicable rate) from payments to funders and remit it to the IRS. Withheld amounts are credited against the funder's tax liability.
- Liability rules: Withholding agents are protected from claims if they comply, but face penalties (including interest) for failures. Overpayments can be refunded to the agent unless actually withheld.
- If tax is paid directly by the funder after non-withholding, the agent is relieved of collection but not penalties.
- Other Technical Changes:
- Proceeds from these agreements are excluded from the definition of "capital assets" (under Section 1221), meaning they cannot qualify for favorable capital gains treatment.
- Qualified litigation proceeds are fully excluded from gross income (under new Section 139J), so they are not subject to regular income tax—instead, only the new specific tax applies.
- Effective Date: Applies to tax years beginning after December 31, 2025. Clerical updates to the tax code tables are included for organization.
Significant Changes to Existing Law
- New Tax Chapter: Adds Chapter 50B to the Internal Revenue Code's Subtitle D (miscellaneous excise taxes), creating a dedicated excise-style tax on litigation funding profits, separate from standard income taxation.
- Exclusion from Gross Income and Capital Assets: Introduces Section 139J to remove these proceeds from a recipient's taxable income entirely, while amending Section 1221 to prevent capital gains treatment. This shifts taxation exclusively to the new framework, potentially simplifying reporting but increasing the effective rate for funders.
- Withholding Mechanism: Mirrors existing withholding rules (e.g., for nonresident aliens) but applies them newly to litigation payments, with added protections and penalties to ensure compliance.
- No changes to underlying litigation laws; focuses solely on tax treatment of funding arrangements.
Potential Impacts
- On Government Agencies: The IRS gains a new revenue stream from taxing high-profit litigation funders, potentially increasing collections from an industry estimated to involve billions in funding. Administrative burden may rise due to new withholding and reporting requirements, but clerical amendments aim to integrate it smoothly.
- On Citizens: Litigants relying on third-party funding (e.g., individuals or small businesses unable to afford lawsuits) may face higher costs, as funders could pass on the tax burden through reduced funding availability or higher fees, potentially limiting access to courts for those without resources.
- On International Relations: Foreign entities (including sovereign wealth funds) are explicitly included, which could affect cross-border investments in U.S. litigation. This might deter foreign funding of U.S. cases, influencing global views on U.S. legal financing practices without direct diplomatic impacts.
Main Stakeholders Affected
- Third-Party Funders: Domestic and foreign investors in litigation (e.g., hedge funds, specialty finance firms) face the new tax, potentially reducing profitability and altering business models.
- Litigants and Law Firms: Parties in civil cases or their attorneys must handle withholding, increasing administrative duties; plaintiffs may see changes in funding options, affecting case viability.
- U.S. Taxpayers and Government: Broader public benefits from targeted revenue without general tax hikes, but indirect effects could include fewer frivolous lawsuits if funding dries up.
- Attorneys: Excluded from the "covered party" definition, but co-counsel or firms with contingent fees (paid from case proceeds) may be indirectly involved in agreements.
Notable Legal, Constitutional, or Political Implications
- Legal Implications: The broad definitions (e.g., including "substantially similar" agreements) give the IRS flexibility to interpret and enforce, potentially leading to disputes over what qualifies as funding versus a simple loan. The anti-netting and non-exclusion rules prevent tax avoidance, but could invite challenges on overreach. Withholding provisions indemnify compliant agents, reducing litigation risk for them.
- Constitutional Implications: Relies on Congress's taxing power (Article I, Section 8), likely constitutional as it targets specific commercial activity without infringing free speech or due process. However, applying to foreign entities might raise questions under international tax treaties, though no direct conflicts are evident.
- Political Implications: Targets perceived abusive practices in litigation finance (e.g., funding mass torts for profit), aligning with efforts to curb "lawsuit abuse." As a revenue measure, it could appeal across parties but face opposition from plaintiff bar groups concerned about access to justice; no overt partisan bias in the bill text.
This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.
Sponsor
Cosponsors (33)
Rep. Feenstra, Randy [R-IA-4], Rep. Davidson, Warren [R-OH-8], Rep. Kelly, Mike [R-PA-16], Rep. Malliotakis, Nicole [R-NY-11], Rep. Hinson, Ashley [R-IA-2], Rep. Tenney, Claudia [R-NY-24], Rep. LaHood, Darin [R-IL-16], Rep. Yakym, Rudy [R-IN-2], Rep. McCormick, Richard [R-GA-7], Rep. Kustoff, David [R-TN-8], Rep. Moore, Tim [R-NC-14], Rep. Harrigan, Pat [R-NC-10], Rep. Rouzer, David [R-NC-7], Rep. Edwards, Chuck [R-NC-11], Rep. Murphy, Gregory F. [R-NC-3], Rep. Buchanan, Vern [R-FL-16], Rep. Miller, Carol D. [R-WV-1], Rep. Smith, Adrian [R-NE-3], Rep. Gooden, Lance [R-TX-5], Rep. Patronis, Jimmy [R-FL-1], Rep. Webster, Daniel [R-FL-11], Rep. Garbarino, Andrew R. [R-NY-2], Rep. Grothman, Glenn [R-WI-6], Rep. Moore, Blake D. [R-UT-1], Rep. Lawler, Michael [R-NY-17], Rep. Flood, Mike [R-NE-1], Rep. Carey, Mike [R-OH-15], Rep. McDowell, Addison P. [R-NC-6], Rep. Downing, Troy [R-MT-2], Rep. Mann, Tracey [R-KS-1], Rep. Barrett, Tom [R-MI-7], Rep. Goldman, Craig A. [R-TX-12], Rep. Pfluger, August [R-TX-11]
Recent Actions
- 2025-05-20: Referred to the House Committee on Ways and Means.
- 2025-05-20: Introduced in House
- 2025-05-20: Introduced in House
Bill Versions
- Tackling Predatory Litigation Funding Act — issued 2025-05-20 — PDF (11 pages)