[Congressional Bills 119th Congress]
[From the U.S. Government Publishing Office]
[S. 1821 Introduced in Senate (IS)]
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119th CONGRESS
1st Session
S. 1821
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.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
May 20, 2025
Mr. Tillis introduced the following bill; which was read twice and
referred to the Committee on Finance
_______________________________________________________________________
A BILL
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.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Tackling Predatory Litigation
Funding Act''.
SEC. 2. LITIGATION FINANCING.
(a) In General.--Subtitle D of the Internal Revenue Code of 1986 is
amended by adding at the end the following new chapter:
``CHAPTER 50B--LITIGATION FINANCING
``Sec. 5000E-1. Tax imposed.
``Sec. 5000E-2. Definitions.
``Sec. 5000E-3. Special rules.
``SEC. 5000E-1. TAX IMPOSED.
``(a) In General.--A tax is hereby imposed for each taxable year in
an amount equal to the applicable percentage of any qualified
litigation proceeds received by a covered party.
``(b) Applicable Percentage.--For purposes of subsection (a), with
respect to any taxable year, the applicable percentage shall be the
amount (expressed as a percentage) equal to the sum of--
``(1) the highest rate of tax imposed by section 1 for such
taxable year, plus
``(2) 3.8 percentage points.
``(c) Application of Tax for Pass-Thru Entities.--In the case of a
covered party that is a partnership, S corporation, or other pass-thru
entity, the tax imposed under subsection (a) shall be applied at the
entity level.
``SEC. 5000E-2. DEFINITIONS.
``In this chapter--
``(1) Civil action.--
``(A) In general.--The term `civil action' means
any civil action, administrative proceeding, claim, or
cause of action.
``(B) Multiple actions.--The term `civil action'
may, unless otherwise indicated, include more than 1
civil action.
``(2) Covered party.--
``(A) In general.--The term `covered party' means,
with respect to any civil action, any third party
(including an individual, corporation, partnership, or
sovereign wealth fund) to such action which--
``(i) receives funds pursuant to a
litigation financing agreement, and
``(ii) is not an attorney representing a
party to such civil action.
``(B) Inclusion of domestic and foreign entities.--
Subparagraph (A) shall apply to any third party without
regard to whether such party is created or organized in
the United States or under the law of the United States
or of any State.
``(3) Litigation financing agreement.--
``(A) In general.--The term `litigation financing
agreement' means, with respect to any civil action, a
written agreement--
``(i) whereby a third party agrees to
provide funds to one of the named parties or
any law firm affiliated with such civil action,
and
``(ii) which creates a direct or
collateralized interest in the proceeds of such
action (by settlement, verdict, judgment or
otherwise) which--
``(I) is based, in whole or part,
on a funding-based obligation to--
``(aa) such civil action,
``(bb) the appearing
counsel,
``(cc) any contractual co-
counsel, or
``(dd) the law firm of such
counsel or co-counsel, and
``(II) is executed with--
``(aa) any attorney
representing a party to such
civil action,
``(bb) any co-counsel in
the litigation with a
contingent fee interest in the
representation of such party,
``(cc) any third party that
has a collateral-based interest
in the contingency fees of the
counsel or co-counsel firm
which is related, in whole or
part, to the fees derived from
representing such party, or
``(dd) any named party in
such civil action.
``(B) Substantially similar agreements.--The term
`litigation financing agreement' shall include any
contract (including any option, forward contract,
futures contract, short position, swap, or similar
contract) or other agreement which, as determined by
the Secretary, is substantially similar to an agreement
described in subparagraph (A).
``(C) Exceptions.--The term `litigation financing
agreement' shall not include any agreement--
``(i) under which the total amount of funds
described in subparagraph (A)(i) with respect
to an individual civil action is less than
$10,000, or
``(ii) in which the third party described
in subparagraph (A)--
``(I) has a right to receive
proceeds which are derived from, or
pursuant to, such agreement that are
limited to--
``(aa) repayment of the
principal of a loan,
``(bb) repayment of the
principal of a loan plus any
interest on such loan, provided
that the rate of interest does
not exceed the greater of--
``(AA) 7 percent,
or
``(BB) a rate equal
to twice the average
annual yield on 30-year
United States Treasury
securities (as
determined for the year
preceding the date on
which such agreement
was executed), or
``(cc) reimbursement of
attorney's fees, or
``(II) bears a relationship
described in section 267(b) to the
named party receiving the payment
described in subparagraph (A)(i).
``(4) Qualified litigation proceeds.--
``(A) In general.--The term `qualified litigation
proceeds' means, with respect to any taxable year, an
amount equal to the realized gains, net income, or
other profit received by a covered party during such
taxable year which is derived from, or pursuant to, any
litigation financing agreement.
``(B) Anti-netting.--Any gains, income, or profit
described in subparagraph (A) shall not be reduced or
offset by any ordinary or capital loss in the taxable
year.
``(C) Prohibition on exclusion of certain
amounts.--In determining the amount of realized gain
under subparagraph (A), amounts described in section
104(a)(2) and 892(a)(1) shall not be excluded.
``SEC. 5000E-3. SPECIAL RULES.
``(a) Withholding of Tax on Litigation Proceeds.--Any applicable
person having the control, receipt, or custody of any proceeds from a
civil action (by settlement, judgment, or otherwise) with respect to
which such person had entered into a litigation financing agreement
shall deduct and withhold from such proceeds a tax equal to 50 percent
of the applicable percentage (as determined under section 5000E-1(b))
of any payments which are required to be made to a third party pursuant
to such agreement.
``(b) Applicable Person.--For purposes of this section, the term
`applicable person' means any person which--
``(1) is a named party in a civil action or a law firm
affiliated with such civil action, and
``(2) has entered into a litigation financing agreement
with respect to such civil action.
``(c) Application of Withholding Provisions.--
``(1) Liability for withheld tax.--Every person required to
deduct and withhold any tax under this chapter is hereby made
liable for such tax and is hereby indemnified against the
claims and demands of any person for the amount of any payments
made in accordance with the provisions of this chapter.
``(2) Withheld tax as credit to recipient of qualified
litigation proceeds.--Qualified litigation proceeds on which
any tax is required to be withheld at the source under this
chapter shall be included in the return of the recipient of
such proceeds, but any amount of tax so withheld shall be
credited against the amount of tax as computed in such return.
``(3) Tax paid by recipient of qualified litigation
proceeds.--If--
``(A) any person, in violation of the provisions of
this chapter, fails to deduct and withhold any tax
under this chapter, and
``(B) thereafter the tax against which such tax may
be credited is paid,
the tax so required to be deducted and withheld shall not be
collected from such person, but this paragraph shall in no case
relieve such person from liability for interest or any
penalties or additions to the tax otherwise applicable in
respect of such failure to deduct and withhold.
``(4) Refunds and credits with respect to withheld tax.--
Where there has been an overpayment of tax under this chapter,
any refund or credit made under chapter 65 shall be made to the
withholding agent unless the amount of such tax was actually
withheld by the withholding agent.''.
(b) Exclusion From Definition of Capital Asset.--Section 1221(a) of
the Internal Revenue Code of 1986 is amended--
(1) in paragraph (7), by striking ``or'' at the end,
(2) in paragraph (8), by striking the period at the end and
inserting ``; or'', and
(3) by adding at the end the following new paragraph:
``(9) any financial arrangement created by, or any proceeds
derived from, a litigation financing agreement (as defined
under section 5000E-2).''.
(c) Removal From Gross Income.--Part III of subchapter B of chapter
1 of the Internal Revenue Code of 1986 is amended by inserting after
section 139I the following new section:
``SEC. 139J. QUALIFIED LITIGATION PROCEEDS.
``Gross income shall not include any qualified litigation proceeds
(as defined in section 5000E-2).''.
(d) Clerical Amendments.--
(1) Section 7701(a)(16) of the Internal Revenue Code of
1986 is amended by inserting ``5000E-3(c)(1),'' before
``1441''.
(2) The table of chapters for subtitle D of the Internal
Revenue Code of 1986 is amended by inserting after the item
relating to chapter 50A the following new item:
``chapter 50b--litigation financing''.
(3) The table of sections for part III of subchapter B of
chapter 1 of such Code is amended by inserting after the item
relating to section 139I the following new item:
``Sec. 139J. Qualified litigation proceeds.''.
(e) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2025.
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