This bill adds a new chapter to the Internal Revenue Code to tax third-party entities that receive money from litigation financing agreements. It defines "covered party" as a third party (domestic or foreign) that provides funds under a written litigation financing agreement and is not an attorney. The tax is equal to the "applicable percentage" of qualified litigation proceeds. The applicable percentage is the highest individual income tax rate for the year plus 3.8 percentage points. For partnerships, S corporations, and other pass-through entities, the tax is applied at the entity level.
The bill defines "litigation financing agreement" broadly to cover written contracts that create a direct or collateral interest in litigation proceeds and that are executed with an attorney, co-counsel, a law firm, a named party, or a related third party. It also covers substantially similar financial contracts. Small funding agreements under $10,000 are excluded. Agreements limited to simple loan repayment or limited interest (capped at the greater of 7% or twice the prior year’s average annual yield on 30-year Treasury securities) or reimbursement of attorney fees are also excluded. Related-party arrangements described in section 267(b) are excluded.
"Qualified litigation proceeds" are defined as the realized gains, net income, or other profit a covered party receives from a litigation financing agreement. Those gains may not be reduced by ordinary or capital losses (an anti-netting rule). The bill also says that amounts normally excluded under sections 104(a)(2) and 892(a)(1) cannot be excluded when computing realized gain.
The bill requires withholding: any named party or law firm that entered a litigation financing agreement must deduct and withhold a tax equal to 50 percent of the applicable percentage (as defined above) of payments that will be made to the third-party funder. The law makes the withholding agent liable for the withheld tax, allows the withheld tax to be credited against the recipient’s tax liability, and sets rules for refunds, credits, and penalties. The bill also adds a separate provision stating that gross income shall not include any qualified litigation proceeds. The amendments apply to taxable years beginning after December 31, 2025.
No publicly available information on estimated federal revenue gains or administrative costs is included in the bill text. The bill does create new tax and withholding obligations, which may require parties to collect, report, and remit tax amounts and to adjust tax returns accordingly.
No publicly available information.
No publicly available information.