H.R. 3512 — Tackling Predatory Litigation Funding Act

This section establishes a new excise tax under chapter 50B of the Internal Revenue Code on qualified litigation proceeds (i.e., realized gains, net income, or profit derived from litigation financing agreements, without loss netting or exclusions under IRC §§104(a)(2) or 892(a)(1)) received each taxable year by covered parties (i.e., third-party funders, including individuals, corporations, partnerships, or sovereign wealth funds, domestic or foreign, excluding attorneys representing parties to the civil action). The tax equals the highest individual income tax rate under IRC §1 plus 3.8 percentage points and applies at the entity level for pass-through entities (partnerships, S corporations, or similar). Litigation financing agreements generally include non-de minimis written agreements ($10,000 or more in funds provided) creating a direct or collateralized interest in civil action proceeds (settlements, judgments, or otherwise) for named parties, affiliated law firms, or counsel; exceptions apply for small amounts under $10,000, repayment limited to principal or principal plus interest not exceeding the greater of 7% or twice the prior-year average 30-year Treasury yield, attorney fee reimbursements, or related-party relationships under IRC §267(b). Applicable persons (named parties or affiliated law firms entering such agreements) must withhold tax at 50% of the applicable percentage on payments to third parties and are liable therefor (with indemnification).