New tax on litigation funders may chill access to justice for cash-strapped plaintiffs

What it does

This bill imposes a new federal tax on third-party litigation funders—companies or individuals that provide money to plaintiffs or law firms in exchange for a share of settlement or judgment proceeds. The tax rate is the top individual income tax rate plus 3.8 percentage points (roughly 27.8% under current law). The bill also excludes litigation-financing proceeds from the recipient's gross income while requiring withholding at the source, and treats litigation-financing arrangements as non-capital assets. The stated purpose is to discourage 'predatory' litigation funding, but the operative effect is to tax and regulate a growing financial sector that funds civil litigation.

Why we flagged it

The bill's core mechanism is a new excise tax on third-party litigation funders, paired with withholding requirements and asset-classification changes. While framed as anti-predatory, it functions as a direct tax on a specific financial sector and its transactions.

What the text implies

• The withholding requirement (50% of the applicable tax rate) creates a cash-flow burden on law firms and plaintiffs at settlement, potentially forcing early disclosure of funding arrangements and reducing negotiating flexibility.
• The exclusion of litigation-financing proceeds from gross income (Section 139J) while simultaneously taxing them under Section 5000E–1 creates a potential double-benefit for funders: they may claim the proceeds as non-taxable income while the funder pays tax, inverting normal tax incidence.
• The $10,000 threshold for triggering the tax creates a cliff effect: small litigation funders below the threshold face no tax, while those above it face a 27.8% rate, potentially fragmenting the market into many small, unregulated funders.
• The anti-netting provision (prohibiting offset of losses against gains) means funders cannot deduct losses from failed litigation investments, effectively raising the tax rate on net returns and potentially reducing capital availability for risky cases.
• The bill applies to 'sovereign wealth funds' and foreign entities without regard to US incorporation, potentially triggering international tax disputes and affecting cross-border litigation financing.

Section numbers refer to the bill text the analysis read — linked under Primary records below.

Who it affects

The bill may reduce litigation funding available to plaintiffs with weak cases or limited resources, potentially blocking meritorious claims that cannot proceed without third-party capital. However, it may also reduce frivolous or inflated claims funded by speculative investors, and it imposes a tax on a financial intermediary rather than on plaintiffs themselves. The net effect on ordinary citizens' access to justice is genuinely unclear and depends on how the litigation-funding market responds

Who stands to gain

• U.S. Treasury (tax revenue)
• Law firms (reduced competition from alternative funding sources)
• Insurance companies (reduced litigation funding may lower settlement pressures)

Named in the bill

Internal Revenue Service, Third-party litigation funders, Law firms, Plaintiffs, Sovereign wealth funds, U.S. Treasury

Where it stands

39 cosponsors: 39 Republicans.

• May 20, 2025 — Introduced · Congress.gov: “Introduced in House”
• May 20, 2025 — Referred to House Committee on Ways and Means · Congress.gov: “Referred to the House Committee on Ways and Means”

Dates and quoted wording are Congress.gov's action record; the timeline shows status changes, not every procedural step.

Money around this bill

35 lobbying clients named this bill on 59 disclosure filings across 2 quarters, Dec 2025 to Jun 2026. Those filings disclosed $57,838,667 in lobbying spend. A filing names 12 bills on average, so that figure is what each filing reported, not a share belonging to this bill.

More lobbying clients named this bill than 98% of bills with at least one filing.

Kevin Hern, the sponsor, reported $2,075,651 in PAC receipts in the 2026 cycle. $13,000 of that came from 2 PACs tied to these lobbying clients.

• Chamber of Commerce of the U.S.A. — $34,910,000 on 2 filings
• American Association for Justice — $3,610,000 on 2 filings
• American Property Casualty Insurance Association — $3,540,000 on 2 filings
• Fedex Corporation — $2,930,000 on 1 filing
• American Hotel & Lodging Association — $1,680,000 on 2 filings

Lobbying Disclosure Act filings through Jul 23, 2026. A filing shows who paid to lobby on a bill it names, not what changed.