Tackling Predatory Litigation Funding Act
HB3512, titled the “Tackling Predatory Litigation Funding Act,” would create a new federal tax regime for income tied to litigation financing. The bill adds a new chapter to the Internal Revenue Code imposing a tax on “qualified litigation proceeds” received by a “covered party,” generally a third party that funded a lawsuit and receives a share of the recovery. The tax rate would equal the highest individual income tax rate plus 3.8 percentage points, and it would apply at the entity level for pass-through entities such as partnerships and S corporations.
The bill defines litigation financing agreements broadly to cover arrangements in which a third party provides funds to a party or affiliated law firm in exchange for a direct or collateralized interest in the proceeds of a civil action. It also includes anti-avoidance language for substantially similar contracts and sets exceptions for smaller funding arrangements under $10,000 and for certain traditional lending or fee-reimbursement arrangements with capped returns. The bill further requires withholding on payments to third-party funders, treats the withheld amount as a credit to the recipient, and provides rules for liability, refunds, and penalties.
In addition to the new tax, the bill amends the tax code to exclude litigation-financing arrangements and their proceeds from the definition of capital assets and to exclude qualified litigation proceeds from gross income. It also makes conforming clerical changes and applies the new rules to taxable years beginning after December 31, 2025. The practical effect would be to increase federal tax burdens and reporting/withholding obligations on litigation funders, while limiting the tax treatment of proceeds from funded lawsuits.
The available context suggests the bill was introduced and referred to the House Committee on Ways and Means, with no recorded committee transcript or vote history provided. The bill’s title and structure indicate a policy goal of discouraging or deterring third-party litigation funding, especially arrangements viewed by supporters as speculative or predatory. Because there is no recorded debate or vote in the provided materials, the overall sentiment cannot be measured from legislative action, but the framing of the bill is clearly critical of litigation finance.
The main point of contention is likely whether litigation funding is a harmful speculative practice that should be targeted through taxation, or a legitimate financing tool that helps plaintiffs and law firms pursue claims. The bill’s broad definitions, its treatment of foreign and domestic funders alike, and the inclusion of law-firm-related arrangements could raise concerns among litigation finance firms, plaintiff-side attorneys, and some access-to-justice advocates. Supporters would likely argue that the measure curbs abusive funding practices and aligns tax treatment with the bill’s policy objective.
HB3512 would amend the Internal Revenue Code by creating a new Chapter 50B on litigation financing, imposing a special tax on litigation-funding returns, requiring withholding on certain lawsuit proceeds, and excluding litigation-financing arrangements and proceeds from capital asset and gross-income rules. It would directly affect third-party litigation funders, certain law firms, and parties receiving funded litigation recoveries, while also adding compliance and withholding obligations for persons controlling settlement or judgment proceeds. The amendments would apply to taxable years beginning after December 31, 2025.
Based on the bill text and caption, the measure is framed positively by its sponsors as an anti-abuse or consumer-protection style tax reform aimed at “predatory” litigation funding. However, the provided legislative record contains no committee transcript, vote tally, or recorded amendments, so there is no documented bipartisan or partisan sentiment in the materials beyond the bill’s own critical framing of litigation finance. The absence of recorded opposition or support in the context means sentiment can only be inferred from the bill’s purpose and title, not from legislative debate.
The likely controversy centers on whether litigation funding should be treated as a legitimate financial product or as a practice warranting punitive tax treatment. Opponents would likely object to the bill’s broad definition of covered parties and litigation financing agreements, which can reach domestic and foreign entities and may capture some arrangements involving law firms, co-counsel, or collateralized fee interests. Supporters would likely emphasize the bill’s exceptions for small-dollar funding and conventional loans, arguing that the tax targets only high-return speculative investments in lawsuits. The lack of committee discussion or votes means no specific member objections are recorded, but the policy dispute is inherent in the bill’s design.