Tackling Predatory Litigation Funding Act
- Bill Number
- S. 1821
- Origin Chamber
- Senate
- Congress
- 119th Congress, Session 1
- Policy Area
- Taxation
- Status
- Introduced
- Latest Action
- 2025-05-20: Read twice and referred to the Committee on Finance.
- Last Updated
- 2026-04-29T11:03:32Z
AI-Generated Summary
Purpose
The Tackling Predatory Litigation Funding Act (S. 1821) aims to discourage third-party financing of lawsuits by imposing a specific tax on profits earned by non-attorney entities that fund litigation in exchange for a share of the proceeds. It targets arrangements seen as exploitative, such as those where funders advance money to plaintiffs or law firms and claim a portion of any settlement or judgment.
Key Provisions
- New Tax on Litigation Profits: Establishes Chapter 50B in the Internal Revenue Code (IRC), imposing a tax on "qualified litigation proceeds" (profits, gains, or net income from litigation financing agreements) received by "covered parties" (third-party funders, including individuals, corporations, partnerships, or sovereign wealth funds, whether domestic or foreign, excluding attorneys).
- Tax rate: The highest individual income tax rate (under IRC Section 1) plus an additional 3.8 percentage points (e.g., if the top rate is 37%, the total would be 40.8%).
- Applies at the entity level for pass-through businesses like partnerships or S corporations.
- Profits cannot be offset by losses in the same tax year, and certain exclusions (e.g., for personal injury awards or foreign government income) do not apply.
- Definition of Litigation Financing Agreement: A written contract where a third party provides funds (at least $10,000) to a party or law firm involved in a civil action (including lawsuits, administrative claims, or similar proceedings) in return for a direct or indirect interest in the proceeds (e.g., settlement or judgment).
- Includes similar financial instruments like options or swaps.
- Exceptions: Small fundings under $10,000; low-interest loans (up to 7% or twice the 30-year Treasury yield); pure reimbursements of attorney fees; or agreements with close relatives or related entities of the litigant (as defined under IRC Section 267(b), which covers family or business affiliates).
- Withholding Requirements: Parties or law firms entering these agreements must withhold tax (50% of the applicable percentage) from payments to funders and remit it to the IRS. Withheld amounts are credited against the funder's tax liability, with rules for refunds, penalties for non-compliance, and liability protections for withholdors.
- Effective Date: Applies to tax years beginning after December 31, 2025.
Significant Changes to Existing Law
- Addition of New IRC Chapter: Introduces Chapter 50B under Subtitle D (miscellaneous excise taxes), creating a standalone tax regime for litigation financing profits outside regular income tax rules.
- Exclusion from Gross Income and Capital Assets:
- Amends IRC Section 1221(a) to exclude litigation financing arrangements and their proceeds from being treated as capital assets (which affects how gains are taxed or reported).
- Adds IRC Section 139J to exclude qualified litigation proceeds from gross income under IRC Part III (which lists specific income exclusions), ensuring they are only subject to the new excise tax rather than standard income taxation.
- Clerical Updates: Adds references in IRC tables and definitions to integrate the new rules seamlessly.
Potential Impacts
- On Government Agencies: The IRS gains new enforcement responsibilities, including audits of financing agreements and withholding compliance, potentially increasing administrative workload but generating revenue from taxed profits.
- On Citizens and Litigants: May reduce access to affordable lawsuit funding for individuals or small businesses facing high litigation costs, as funders pass on tax costs through higher fees or reduced availability; could curb "predatory" practices that lead to aggressive or frivolous lawsuits.
- On International Relations: Applies to foreign entities (e.g., sovereign wealth funds), which might strain relations with countries relying on U.S. litigation investments or prompt retaliatory tax measures abroad.
- Broader Economic Effects: Could decrease overall litigation financing activity, slowing some civil cases (e.g., class actions or personal injury suits) while raising federal tax revenue estimated in the millions annually, depending on market size.
Main Stakeholders Affected
- Third-Party Funders: Primary targets, including domestic and foreign investment firms, hedge funds, and sovereign wealth funds, who face higher costs and reduced profitability on U.S. litigation investments.
- Litigants and Law Firms: Plaintiffs, defendants, and attorneys may see changes in funding options, potentially affecting case strategies, fee structures, or settlement dynamics; law firms must handle withholding duties.
- Taxpayers and the Public: Indirectly impacted through potential shifts in lawsuit volumes, which could influence court backlogs, insurance rates, or corporate behavior in disputes.
- U.S. Government (IRS and Treasury): Responsible for implementation, collections, and rulemaking to define "substantially similar" agreements.
Notable Legal, Constitutional, or Political Implications
- Legal Implications: Introduces anti-avoidance rules (e.g., broad definitions and no loss offsets) to close loopholes, but may lead to litigation over what qualifies as a "litigation financing agreement" or withholding failures; integrates with existing IRC withholding (e.g., Sections 1441 and 3402) for consistency.
- Constitutional Implications: Could face challenges under the Due Process or Equal Protection Clauses if viewed as unfairly targeting a specific industry without broad justification; the inclusion of foreign entities raises questions about extraterritorial application under international tax treaties.
- Political Implications: Reflects a policy push against perceived abuses in the growing litigation finance industry (valued at billions), aligning with efforts to reform civil justice systems; introduced by Sen. Tillis (R-NC), it may appeal to business interests seeking to limit lawsuit funding but draw opposition from consumer advocates concerned about access to justice.
This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.
Sponsor
Cosponsors (7)
Sen. Husted, Jon [R-OH], Sen. Moreno, Bernie [R-OH], Sen. Moody, Ashley [R-FL], Sen. Grassley, Chuck [R-IA], Sen. Daines, Steve [R-MT], Sen. Sheehy, Tim [R-MT], Sen. Ricketts, Pete [R-NE]
Recent Actions
- 2025-05-20: Read twice and referred to the Committee on Finance.
- 2025-05-20: Introduced in Senate
Bill Versions
- Tackling Predatory Litigation Funding Act — issued 2025-05-20 — PDF (11 pages)