The "Tackling Predatory Litigation Funding Act" introduces a new tax regime under the Internal Revenue Code specifically targeting income generated from third-party litigation financing. This legislation imposes a tax on "qualified litigation proceeds" received by a "covered party," which includes any third party—such as individuals, corporations, partnerships, or sovereign wealth funds—that provides funds under a litigation financing agreement and is not an attorney representing a party.

The tax rate is set at the sum of the highest individual income tax rate and an additional 3.8 percentage points, applied at the entity level for pass-through entities. A "litigation financing agreement" is defined as a written agreement where a third party provides funds in exchange for an interest in the proceeds of a civil action, with exceptions for small agreements (under $10,000) or those involving only principal repayment or principal plus limited interest.

Furthermore, the bill mandates that an "applicable person," such as a named party or law firm involved in the civil action, must withhold 50 percent of the calculated applicable percentage from payments made to a third-party funder. "Qualified litigation proceeds" are defined as realized gains, net income, or profit from these agreements, which cannot be reduced by losses and explicitly include amounts typically excluded from gross income under other sections of the code.

To ensure consistent tax treatment, the bill also specifies that financial arrangements and proceeds from litigation financing agreements are not considered capital assets. Additionally, these qualified litigation proceeds are explicitly excluded from gross income, ensuring they are taxed solely under this new framework. The provisions of this act are slated to apply to taxable years beginning after December 31, 2025.