HR3512

HR3512, the "Tackling Predatory Litigation Funding Act," establishes a new tax on income derived from litigation financing. This bill amends the Internal Revenue Code of 1986 by adding a new Chapter 50B, which imposes a tax on "qualified litigation proceeds" received by "covered parties." The tax rate is the highest individual income tax rate plus 3.8 percentage points, applied at the entity level for pass-through entities. This directly reduces the net returns for all third-party litigation funders, making investments in legal cases less attractive and decreasing the overall capital available for litigation. The money trail for litigation finance firms involves providing capital to plaintiffs or law firms in exchange for a portion of any settlement or judgment. This bill directly intercepts that money trail by taxing the proceeds before they reach the funders' bottom line. Companies like Burford Capital (publicly traded in London, but with significant US operations, and its US-listed shares are ), which specialize in litigation finance, will see their revenue effectively taxed at a significantly higher rate. Private equity firms such as Blackstone ($BX), KKR ($KKR), and Apollo Global Management ($APO) that have invested in or have divisions focused on litigation finance will also experience reduced returns from these investments. Historically, direct federal taxation specifically targeting a niche financial product like litigation funding is unprecedented. However, regulatory actions that increase the cost of capital or reduce profitability in specialized financial sectors have consistently led to market contraction. For instance, increased regulatory scrutiny and capital requirements on shadow banking in the post-2008 era led to a slowdown in certain non-bank lending activities. While not a direct tax, the effect of reduced profitability and increased operational burden is similar. The bill's sponsor, Rep. Hern, a Republican, indicates a bipartisan interest in curbing perceived abuses in this sector, suggesting potential for movement. Specific losers are companies whose primary business is litigation finance or those with significant exposure to it. Burford Capital stands to lose directly due to the new tax on its core income. Private equity firms like Blackstone ($BX), KKR ($KKR), and Apollo Global Management ($APO) that have diversified into litigation finance will see a reduction in the profitability of those specific ventures. There are no clear winners from this legislation; it is designed to extract revenue from a specific industry. The bill has been referred to the House Committee on Ways and Means, which handles tax legislation, indicating it is in the appropriate committee for consideration. The next step is committee hearings and potential mark-up, which could occur in the coming months. This bill does not appropriate money; it imposes a new tax. The mechanism is a direct tax on income from litigation financing agreements. The tax applies to both domestic and foreign entities, ensuring comprehensive coverage. The impact is a direct reduction in the profitability of litigation finance, which will likely lead to a decrease in the volume of funded litigation.