Senate Adds Litigation Funding Levy to Its Tax Bill 

Senate Republicans, in an effort that could significantly restrict funding for civil litigation, added a stiff levy on litigation funding in its version of the GOP tax bill, likely curtailing demand for the investment vehicle. 

The proposed change would introduce a comprehensive tax regime for third-party litigation funding by imposing a new tax on income received by both domestic and foreign investors who finance legal claims in exchange for a contingent return, taxing this income at the highest individual income tax rate plus 3.8% which equates to a 40.8% tax.  

The measure also would reclassify such proceeds to exclude them from capital asset treatment and gross income under current provisions, disallows loss offsets, and overrides certain exclusions. It also would impose strict obligations on parties or law firms distributing funds, with penalties for noncompliance.  

Exceptions include a $10,000 de minimis threshold, safe harbor for interest rates, and carveouts for non-contingent loan arrangements. This change aims to tighten oversight and increase tax compliance in the litigation finance sector starting in tax years after 2025, according to the bill.  

Litigation funding is a financial arrangement in which a third party provides capital to a plaintiff or law firm to cover the costs of a lawsuit. This support enables plaintiffs to pursue legal claims without paying expenses upfront. In return, the funder receives a portion of any settlement or court-awarded judgment if the case succeeds. 

Institutional investors, including pension funds, endowments and foundations, have allocated to litigation finance as a diversifying class that is defensive and uncorrelated to equity risk. It is regarded as a low-volatility asset class with a high Shape-ratio, meaning it can be a source of strong returns, relative to risk. 

Boris Ziser, partner and co-head of finance at Schulte Roth & Zabel, says that the bill would cripple litigation funding investment. 

“It’s really a policy bill, masquerading as a fiscal measure,” Ziser says. “It purports to address a perceived foreign influence in litigation funding, which I don’t think exists, but also closing a loophole, which also doesn’t exist, because litigation funders pay tax under the same tax system as other investors.” 

Still, the Joint Committee on Taxation estimated that the provision would raise $8.8 billion over the next decade, as Republicans seek avenues to raise tax revenue to offset the steep costs of extending the 2017 tax cuts.  

Ziser says the bill will ultimately fail to collect the revenue Republicans expect it to. 

“If it eliminates litigation funding or effectively cripples it, there’s not going to be revenue to be taxed, so there will be no tax revenue,” he says. 

Beyond litigation funding, Ziser says the provision would also impact financial markets far more broadly than just litigation funding. That includes corporate loans, debtor-in-possession loans, and securitizations, affecting transactions and industries that the bill likely was not intending to reach. 

Donald Grunewald, director of litigation analysis at ISS Securities Class Action Services, which like PLANSPONSOR, is owned by ISS STOXXX, says litigation funding is slightly less important for civil litigation domestically since many firms are deep-pocketed, and do not have as large a need for outside capital, whereas litigation funding is vital in cases outside the U.S. because in many countries contingency fees are not allowed and because there are loser-pay risks. 

Still, the domestic market for litigation funding totaled about $4.75 billion in settlements in 2024 and $5.85 billion in 2023, according to ISS SCAS. 

Some of the largest domestic litigation funders include Burford Capital, Bench Walk Advisors, DRRT Limited and TRGP Capital, according to ISS SCAS.  

Tags: Congress, litigation funding