119-s1821

[Congressional Bills 119th Congress]
[From the U.S. Government Publishing Office]
[S. 1821 Introduced in Senate

    (IS) ]

<DOC>

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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