H.R. 3512: Tackling Predatory Litigation Funding Act

This bill, titled the Tackling Predatory Litigation Funding Act, aims to establish a tax on income derived from litigation financing agreements. Here’s a breakdown of the main provisions:

Imposition of Tax

The bill proposes a new chapter in the Internal Revenue Code that would impose a tax on qualified litigation proceeds received by third parties involved in financing lawsuits. This tax will apply for each taxable year and will equal a specified percentage of the proceeds received from these agreements.

Tax Rate

The applicable tax rate is defined as the sum of:

• The highest income tax rate for that taxable year.
• An additional 3.8 percentage points.

Definition of Terms

• Civil Action: This refers to any civil action, administrative proceeding, claim, or cause of action.
• Covered Party: This is any third party that enters into a litigation financing agreement and is not an attorney representing a party to the action.
• Litigation Financing Agreement: This is a written agreement where a third party provides funds to a party involved in a civil action, creating an interest in the proceeds from that action.
• Qualified Litigation Proceeds: These are realized gains, net income, or other profits that a covered party receives from a litigation financing agreement.

Special Provisions

Included in the bill are special rules for withholding taxes on litigation proceeds. Individuals or entities that hold or receive litigation proceeds affected by a financing agreement must withhold a portion of the proceeds as tax.

Exemptions

The bill outlines exceptions for agreements where the funds involved are under $10,000 or are limited to specific financial arrangements, such as loan repayments or reimbursements for attorney fees. These exceptions are meant to exclude smaller or less complex financing agreements from the tax.

Reporting and Withholding

Those responsible for managing the proceeds of a civil action are required to withhold tax on the applicable proceeds. If a party fails to withhold the correct amount, they may still be liable for the tax, but the obligation to pay will not apply if the tax is properly credited against their total tax owed.

Impact on Gross Income

The bill also specifies that qualified litigation proceeds will not be included in the gross income of the recipients, which could affect their overall tax obligations.

Effective Date

The provisions outlined in this bill will take effect for taxable years beginning after December 31, 2025.

Relevant Companies

• BCOR - Blucora, Inc. may be impacted due to its involvement in the litigation financing sector.
• ILPT - Industrial Logistics Properties Trust may also be affected as an entity that could engage in financing litigation.