Tackling Predatory Litigation Funding Act
SB 1821, the “Tackling Predatory Litigation Funding Act,” would create a new federal tax regime for income tied to third-party 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 for the year 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 written 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, including settlements and judgments. It also extends to substantially similar contracts and applies to both domestic and foreign entities. Small funding arrangements under $10,000 and certain traditional lending or fee-reimbursement arrangements are excluded if the return is limited to principal, limited-interest loan repayment, or reimbursement of attorney’s fees.
In addition to the new tax, the bill would change how litigation-financing proceeds are treated under federal tax law. It would exclude such arrangements and proceeds from the definition of capital assets, and it would exclude qualified litigation proceeds from gross income altogether. The bill also creates withholding rules requiring the party or law firm controlling the proceeds to withhold part of the tax at the source, and it includes related credit, liability, and refund provisions. The amendments would apply to taxable years beginning after December 31, 2025.
The overall sentiment reflected in the bill title and structure is strongly critical of third-party litigation funding, framing it as “predatory” and aiming to discourage or reduce the practice through taxation and reporting mechanics. Because there were no committee transcripts or recorded votes provided, there is no direct evidence of debate or bipartisan support/opposition in the available record. The bill’s design suggests likely support from those concerned about lawsuit financing and tort costs, and likely resistance from litigation funders, some plaintiffs’ attorneys, and others who view third-party funding as a tool for access to justice.
The main point of contention is whether the bill targets abusive speculation in lawsuits or instead burdens legitimate financing that helps plaintiffs pursue claims. Another likely dispute is the breadth of the definitions, which sweep in many third-party arrangements and foreign entities while carving out only narrow exceptions. Critics may argue the tax structure and withholding rules are complex and could chill financing markets, while supporters would likely argue the measure is needed to curb profit-driven litigation investment.
The bill would add a new Chapter 50B to the Internal Revenue Code and create a federal excise-style tax on profits from litigation financing, while also amending the Code’s treatment of those proceeds as non-capital assets and excluded from gross income. It would impose withholding obligations on named parties and affiliated law firms involved in financed litigation, and it would apply prospectively to taxable years beginning after December 31, 2025. The practical effect would be to increase the federal tax burden and compliance obligations for third-party litigation funders and related recipients of litigation recoveries.
The bill is framed in highly negative terms toward litigation funding, signaling a reform or restriction-oriented approach rather than a neutral regulatory one. In the absence of hearings, transcripts, or votes, the available record does not show measured legislative debate, but the title and provisions indicate a clear policy judgment that third-party litigation funding is harmful or abusive. Support would likely come from lawmakers skeptical of lawsuit financing, while opposition would likely come from the litigation funding industry and plaintiff-side advocates.
The central controversy is whether third-party litigation funding is a predatory practice that should be discouraged through taxation, or a legitimate financing mechanism that expands access to the courts. Opponents are likely to object to the bill’s broad definition of covered arrangements, its inclusion of foreign and domestic entities, and the withholding rules that place compliance duties on parties and law firms. Supporters are likely to favor the bill’s narrow exceptions and its attempt to distinguish ordinary loans and attorney fee reimbursement from profit-sharing litigation investments.