Sponsors (40)
The bill lowers and simplifies taxation for recipients of litigation proceeds, providing relief to claimants, but risks reducing federal revenue, creating IRS enforcement and interpretation challenges, and producing uneven incentives and fairness among litigants.
People who receive court judgments, settlements, or litigation financing can exclude qualified litigation proceeds from gross income, lowering their federal tax bills.
People receiving litigation proceeds and taxpayers generally: treating those proceeds as non‑capital assets clarifies and simplifies tax treatment and avoids characterizing such receipts as capital gains.
Taxpayers who sell or assign litigation interests may receive preferential (lower) tax treatment, which can reduce federal tax revenue and effectively shift tax burdens onto other taxpayers.
The Secretary of the Treasury and taxpayers may face ambiguous or broad definitions in the new rules, creating tax‑planning opportunities, increased dispute risk, and greater IRS enforcement complexity and cost.
Claimants and litigants who receive different forms of awards: excluding certain litigation proceeds from income may reduce incentives to seek taxable settlements and create unequal tax treatment or perceived unfairness between litigants.
Based on analysis of 2 sections of legislative text.
Excludes qualified litigation financing proceeds from gross income and from the capital-asset definition for federal 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
Excludes proceeds from qualified litigation financing arrangements from gross income and removes those proceeds from the definition of capital assets for federal tax purposes. The change creates new statutory references to defined terms (in a separate new section) and takes effect for taxable years beginning after December 31, 2025. The bill amends the Internal Revenue Code to add a new income exclusion and a capital-asset exception specifically for litigation financing, and updates internal tables/definitions to reflect the new provisions. The precise scope depends on definitions of “litigation financing agreement” and “qualified litigation proceeds” placed in a new, separate tax provision not provided here.