SEC. 2. LITIGATION FINANCING. 
(a) IN GENERAL.—Subtitle D of the Internal Rev-
enue Code of 1986 is amended by adding at the end the 
following new chapter: 
‘‘CHAPTER 50B—LITIGATION FINANCING 
‘‘Sec. 5000E–1. Tax imposed. 
‘‘Sec. 5000E–2. Definitions. 
‘‘Sec. 5000E–3. Special rules. 
‘‘SEC. 5000E–1. TAX IMPOSED. 
‘‘(a) IN GENERAL.—A tax is hereby imposed for each 
taxable year in an amount equal to the applicable percent-
age of any qualified litigation proceeds received by a cov-
ered party. 
‘‘(b) APPLICABLE PERCENTAGE.—For purposes of 
subsection (a), with respect to any taxable year, the appli-
cable percentage shall be the amount (expressed as a per-
centage) equal to the sum of— 
‘‘(1) the highest rate of tax imposed by section 
1 for such taxable year, plus 
‘‘(2) 3.8 percentage points. 
‘‘(c) APPLICATION OF TAX FOR PASS-THRU ENTI-
TIES.—In the case of a covered party that is a partner-
ship, S corporation, or other pass-thru entity, the tax im-
posed under subsection (a) shall be applied at the entity 
level. 
‘‘SEC. 5000E–2. DEFINITIONS. 
‘‘In this chapter— 
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‘‘(1) CIVIL ACTION.— 
‘‘(A) IN GENERAL.—The term ‘civil action’ 
means any civil action, administrative pro-
ceeding, claim, or cause of action. 
‘‘(B) MULTIPLE ACTIONS.—The term ‘civil 
action’ may, unless otherwise indicated, include 
more than 1 civil action. 
‘‘(2) COVERED PARTY.— 
‘‘(A) IN
GENERAL.—The term ‘covered 
party’ means, with respect to any civil action, 
any third party (including an individual, cor-
poration, partnership, or sovereign wealth fund) 
to such action which— 
‘‘(i) receives funds pursuant to a liti-
gation financing agreement, and 
‘‘(ii) is not an attorney representing a 
party to such civil action. 
‘‘(B) INCLUSION OF DOMESTIC AND FOR-
EIGN ENTITIES.—Subparagraph (A) shall apply 
to any third party without regard to whether 
such party is created or organized in the United 
States or under the law of the United States or 
of any State. 
‘‘(3) LITIGATION FINANCING AGREEMENT.— 
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‘‘(A) IN
GENERAL.—The term ‘litigation 
financing agreement’ means, with respect to 
any civil action, a written agreement— 
‘‘(i) whereby a third party agrees to 
provide funds to one of the named parties 
or any law firm affiliated with such civil 
action, and 
‘‘(ii) 
which 
creates 
a 
direct 
or 
collateralized interest in the proceeds of 
such action (by settlement, verdict, judg-
ment or otherwise) which— 
‘‘(I) is based, in whole or part, 
on a funding-based obligation to— 
‘‘(aa) such civil action, 
‘‘(bb) the appearing counsel, 
‘‘(cc) any contractual co- 
counsel, or 
‘‘(dd) the law firm of such 
counsel or co-counsel, and 
‘‘(II) is executed with— 
‘‘(aa) 
any 
attorney 
rep-
resenting a party to such civil ac-
tion, 
‘‘(bb) any co-counsel in the 
litigation with a contingent fee 
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interest in the representation of 
such party, 
‘‘(cc) any third party that 
has a collateral-based interest in 
the contingency fees of the coun-
sel or co-counsel firm which is re-
lated, in whole or part, to the 
fees derived from representing 
such party, or 
‘‘(dd) any named party in 
such civil action. 
‘‘(B) SUBSTANTIALLY
SIMILAR
AGREE-
MENTS.—The term ‘litigation financing agree-
ment’ shall include any contract (including any 
option, forward contract, futures contract, short 
position, swap, or similar contract) or other 
agreement which, as determined by the Sec-
retary, is substantially similar to an agreement 
described in subparagraph (A). 
‘‘(C) EXCEPTIONS.—The term ‘litigation 
financing agreement’ shall not include any 
agreement— 
‘‘(i) under which the total amount of 
funds described in subparagraph (A)(i) 
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with respect to an individual civil action is 
less than $10,000, or 
‘‘(ii) in which the third party de-
scribed in subparagraph (A)— 
‘‘(I) has a right to receive pro-
ceeds which are derived from, or pur-
suant to, such agreement that are lim-
ited to— 
‘‘(aa) repayment of the prin-
cipal of a loan, 
‘‘(bb) repayment of the prin-
cipal of a loan plus any interest 
on such loan, provided that the 
rate of interest does not exceed 
the greater of— 
‘‘(AA) 7 percent, or 
‘‘(BB) a rate equal to 
twice the average annual 
yield 
on 
30-year 
United 
States Treasury securities 
(as determined for the year 
preceding the date on which 
such agreement was exe-
cuted), or 
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‘‘(cc) reimbursement of at-
torney’s fees, or 
‘‘(II) bears a relationship de-
scribed in section 267(b) to the 
named party receiving the payment 
described in subparagraph (A)(i). 
‘‘(4) QUALIFIED LITIGATION PROCEEDS.— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
litigation proceeds’ means, with respect to any 
taxable year, an amount equal to the realized 
gains, net income, or other profit received by a 
covered party during such taxable year which is 
derived from, or pursuant to, any litigation fi-
nancing agreement. 
‘‘(B) ANTI-NETTING.—Any gains, income, 
or profit described in subparagraph (A) shall 
not be reduced or offset by any ordinary or cap-
ital loss in the taxable year. 
‘‘(C) PROHIBITION ON EXCLUSION OF CER-
TAIN AMOUNTS.—In determining the amount of 
realized gain under subparagraph (A), amounts 
described in section 104(a)(2) and 892(a)(1) 
shall not be excluded. 
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‘‘SEC. 5000E–3. SPECIAL RULES. 
‘‘(a) WITHHOLDING OF TAX ON LITIGATION PRO-
CEEDS.—Any applicable person having the control, re-
ceipt, or custody of any proceeds from a civil action (by 
settlement, judgment, or otherwise) with respect to which 
such person had entered into a litigation financing agree-
ment shall deduct and withhold from such proceeds a tax 
equal to 50 percent of the applicable percentage (as deter-
mined under section 5000E–1(b)) of any payments which 
are required to be made to a third party pursuant to such 
agreement. 
‘‘(b) APPLICABLE PERSON.—For purposes of this 
section, the term ‘applicable person’ means any person 
which— 
‘‘(1) is a named party in a civil action or a law 
firm affiliated with such civil action, and 
‘‘(2) has entered into a litigation financing 
agreement with respect to such civil action. 
‘‘(c) APPLICATION OF WITHHOLDING PROVISIONS.— 
‘‘(1) LIABILITY
FOR
WITHHELD
TAX.—Every 
person required to deduct and withhold any tax 
under this chapter is hereby made liable for such tax 
and is hereby indemnified against the claims and de-
mands of any person for the amount of any pay-
ments made in accordance with the provisions of this 
chapter. 
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‘‘(2) WITHHELD TAX AS CREDIT TO RECIPIENT 
OF
QUALIFIED
LITIGATION
PROCEEDS.—Qualified 
litigation proceeds on which any tax is required to 
be withheld at the source under this chapter shall be 
included in the return of the recipient of such pro-
ceeds, but any amount of tax so withheld shall be 
credited against the amount of tax as computed in 
such return. 
‘‘(3) TAX PAID BY RECIPIENT OF QUALIFIED 
LITIGATION PROCEEDS.—If— 
‘‘(A) any person, in violation of the provi-
sions of this chapter, fails to deduct and with-
hold any tax under this chapter, and 
‘‘(B) thereafter the tax against which such 
tax may be credited is paid, 
the tax so required to be deducted and withheld 
shall not be collected from such person, but this 
paragraph shall in no case relieve such person from 
liability for interest or any penalties or additions to 
the tax otherwise applicable in respect of such fail-
ure to deduct and withhold. 
‘‘(4) REFUNDS AND CREDITS WITH RESPECT TO 
WITHHELD TAX.—Where there has been an overpay-
ment of tax under this chapter, any refund or credit 
made under chapter 65 shall be made to the with-
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holding agent unless the amount of such tax was ac-
tually withheld by the withholding agent.’’. 
(b) EXCLUSION FROM DEFINITION
OF CAPITAL 
ASSET.—Section 1221(a) of the Internal Revenue Code 
of 1986 is amended— 
(1) in paragraph (7), by striking ‘‘or’’ at the 
end, 
(2) in paragraph (8), by striking the period at 
the end and inserting ‘‘; or’’, and 
(3) by adding at the end the following new 
paragraph: 
‘‘(9) any financial arrangement created by, or 
any proceeds derived from, a litigation financing 
agreement (as defined under section 5000E–2).’’. 
(c) REMOVAL FROM GROSS INCOME.—Part III of 
subchapter B of chapter 1 of the Internal Revenue Code 
of 1986 is amended by inserting after section 139I the 
following new section: 
‘‘SEC. 139J. QUALIFIED LITIGATION PROCEEDS. 
‘‘Gross income shall not include any qualified litiga-
tion proceeds (as defined in section 5000E–2).’’. 
(d) CLERICAL AMENDMENTS.— 
(1) Section 7701(a)(16) of the Internal Rev-
enue Code of 1986 is amended by inserting 
‘‘5000E–3(c)(1),’’ before ‘‘1441’’. 
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(2) The table of chapters for subtitle D of the 
Internal Revenue Code of 1986 is amended by in-
serting after the item relating to chapter 50A the 
following new item: 
‘‘CHAPTER 50B—LITIGATION FINANCING’’. 
(3) The table of sections for part III of sub-
chapter B of chapter 1 of such Code is amended by 
inserting after the item relating to section 139I the 
following new item: 
‘‘Sec. 139J. Qualified litigation proceeds.’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2025. 
Æ 
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