H.R. 3512

[Congressional Bills 119th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3512 Introduced in House (IH)]

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119th CONGRESS
1st Session
H. R. 3512

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 HOUSE OF REPRESENTATIVES

May 20, 2025

Mr. Hern of Oklahoma (for himself and Mr. Feenstra) introduced the 
following bill; which was referred to the Committee on Ways and Means

_______________________________________________________________________

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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