Sponsors (38)
The bill provides tax relief and simpler tax treatment for recipients of litigation proceeds, while raising concerns about lost federal revenue, potential tax‑planning/enforcement complexity, and fairness among litigants.
People who receive judgments, settlements, or litigation-financing proceeds can exclude qualified litigation proceeds from gross income, lowering their federal tax bills.
Recipients of litigation financing proceeds are treated as holding non-capital assets, which simplifies tax treatment and reduces instances where such proceeds would be characterized as capital gains.
Taxpayers who sell or assign litigation interests may get preferential tax treatment (lower or non-taxed treatment), reducing federal tax revenue and potentially shifting tax burdens to other taxpayers.
Ambiguous or broad definitions in the new provision could create tax-planning opportunities and increase enforcement and administrative complexity for the IRS and Treasury.
Claimants may face altered incentives and fairness concerns: excluding litigation proceeds could reduce incentives to pursue certain settlements and create disparities between litigants who receive taxable versus non-taxable awards.
Based on analysis of 2 sections of legislative text.
Excludes qualifying litigation-financing proceeds from gross income and removes such financing/proceeds from the capital-asset definition for tax purposes.
Official title: To amend the Internal Revenue Code of 1986 to establish a tax on income from litigation which is received by third-party entities that provided financing for such litigation.
Introduced May 20, 2025 by Kevin Hern · Last progress May 20, 2025
Creates a new federal tax exclusion for proceeds from litigation financing and removes certain litigation financing arrangements from the definition of capital assets for tax purposes. The change applies to taxable years beginning after December 31, 2025 and relies on definitions (not provided here) that define which litigation financing agreements and proceeds qualify for the exclusion. The measure amends the Internal Revenue Code to (1) add litigation financing arrangements/proceeds to a list of items excluded from the capital-asset definition and (2) add a new exclusion from gross income for "qualified litigation proceeds." It also updates internal tax-code tables and cross-references to reflect the new provisions.