Tackling Predatory Litigation Funding Act

This bill would add a federal tax on money that third-party companies make from funding lawsuits. The tax equals the top individual income tax rate plus 3.8 percentage points, applied each year to the lawsuit proceeds those funders receive. If the funder is a partnership or S corporation, the tax is charged at the entity level.

To collect it, the party or law firm in the case that made a financing deal and controls the settlement or judgment money must withhold part of what gets paid to the funder. They must hold back an amount equal to 50% of the calculated tax and send it to the IRS. That withheld amount counts as a credit for the funder on their tax return. The withholder is responsible for this tax and is protected for making the withholding. If they fail to withhold but the funder later pays the tax, the IRS won’t collect that same tax from the withholder, though interest and penalties for failing to withhold can still apply. Refunds of overpayments generally go back to the withholder. An “applicable person” who must withhold includes a named party or a law firm in the case that entered into a litigation financing agreement.

Key points

• Who is affected: Third-party litigation funders; plaintiffs and law firms that used such funding and control settlement funds.
• What changes: New tax on funders’ lawsuit proceeds; upfront withholding from payments; pass-through entities are taxed at the entity level.
• When: The provided text does not state an effective date.