"Thom TIllis" by Gage Skidmore is licensed under CC BY-SA 2.0: https://flic.kr/p/EXv5xG
A new bill introduced by Senator Thom Tillis (R-N.C.) aims to address the problem of predatory third-party litigation funding.
Third-party litigation funding (TPLF) occurs when a third-party entity “invests” in the outcome of a civil litigation case by funding one of the involved parties. This funding is often accompanied by an agreement by which the third-party funder receives a portion of the proceeds if their chosen litigant wins the case.
In recent years, the TPLF industry has exploded to $15.3 billion in annual revenue. Meanwhile, TPLF makes frivolous litigation more likely to be brought and delays litigation timelines, adding costs for Americans.
The Tackling Predatory Litigation Funding Act, introduced as S. 1821, would remove the existing tax incentives for third-party litigation funding. Senator Jon Husted (R-Ohio) is an original cosponsor in addition to Sen. Tillis.
Americans for Tax Reform previously wrote about a similar provision which could be used as a pay-for in reconciliation:
Under our current tax code, the profits of TPLF funders derived from litigation activities are taxed as capital gains. This stands in contrast to the actual defendants who pay ordinary income tax rates on a taxable award from litigation. Thus, TPLF funders pay a lower tax rate on their portion of a court award than actual plaintiffs while foreign TPLF “investors” can leverage this tax treatment to avoid any U.S. tax obligation from using the U.S. court system to target U.S. companies with lawsuits.
Congress should reform the tax code to remove the comparatively favorable tax treatment of TPLF funders, instead treating their income derived from litigation as ordinary income for tax purposes. By doing so Congress can crack down on the abusive practices of third-party litigation funding while generating revenue to use for pro-growth tax cuts.
Addressing predatory practices from third-party litigation funders can provide dual benefits: making the court system more fair and more efficient for Americans, while also providing a key offset for new Trump tax cuts.