Congress taxes litigation funders, risking access to justice for ordinary 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 agreements from being treated as capital assets and removes the tax burden on the litigation proceeds themselves, shifting it entirely to the funder. Litigation funders—a growing industry financing personal injury, employment, and commercial lawsuits—would bear the full tax cost.

Why we flagged it

The bill's core mechanism is a new excise tax on third-party litigation financing entities, paired with definitional and withholding rules designed to capture and tax the funder's share of proceeds. It is functionally a sector-specific tax on a financial intermediary, not a broad tax reform.

What the text implies

• The 50% withholding requirement (section 5000E–3) creates a cash-flow burden on law firms and parties, who must remit half the tax immediately from settlement proceeds, even though the funder may not owe the full amount until filing. This may force plaintiffs to advance tax liability.
• The exclusion of litigation financing agreements from capital-asset treatment (section 1221(9)) may prevent funders from claiming long-term capital gains rates, forcing ordinary income treatment—a secondary tax increase beyond the base rate.
• The definition of 'covered party' includes sovereign wealth funds and foreign entities without regard to US incorporation, potentially triggering international tax disputes and treaty conflicts.
• The $10,000 threshold for triggering the tax creates a cliff: agreements just below $10,000 escape taxation entirely, incentivizing structuring of funding into smaller tranches to avoid the tax.
• Removal of litigation proceeds from gross income (section 139J) for the plaintiff/party but taxation of the funder's share creates asymmetry: the plaintiff receives tax-free proceeds while the funder pays tax on the same economic gain, potentially discouraging funding of meritorious claims.

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

Who it affects

The bill may reduce litigation funding availability, potentially harming plaintiffs who lack resources to pursue valid claims (a cost to citizens seeking justice). However, it may also reduce predatory funding practices that extract excessive returns from settlements, protecting vulnerable plaintiffs from exploitative terms (a benefit to citizens). The net effect on ordinary people depends on whether reduced funding access outweighs reduced predation—a genuine trade-off.

Who stands to gain

• plaintiffs and law firms (reduced tax burden on settlement proceeds)
• federal government (new tax revenue from litigation funders)

Named in the bill

Internal Revenue Service (IRS), litigation financing companies, third-party litigation funders, law firms, sovereign wealth funds, US Treasury

Where it stands

8 cosponsors: 8 Republicans.

• May 20, 2025 — Introduced · Congress.gov: “Introduced in Senate”
• May 20, 2025 — Referred to Senate Committee on Finance · Congress.gov: “Read twice and referred to the Committee on Finance”

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 58 disclosure filings across 2 quarters, Dec 2025 to Jun 2026. Those filings disclosed $36,918,667 in lobbying spend. A filing names 9 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.

Thom Tillis, the sponsor, reported $973,475 in PAC receipts in the 2026 cycle. $7,500 of that came from 2 PACs tied to these lobbying clients.

• Chamber of Commerce of the U.S.A. — $17,960,000 on 1 filing
• 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
• Software & Information Industry Association — $1,396,909 on 1 filing

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