Effort to Close Litigation Funding Tax Loophole Added to Federal Budget Bill

Within changes submitted by U.S. Senate Republicans to President Donald Trump’s tax bill is language that would close a tax “loophole” for third-party litigation funders.

According to text released Monday by U.S. Senate Finance Committee Chairman Mike Crapo, R-Idaho, to be included the budget reconciliation bill, would tax profits made by litigation funders.

The insurance industry has routinely blamed litigation funding—investments in lawsuits in exchange for a percentage of a settlement or judgment—for the rapid increase in litigation costs. There isn’t a federal law that requires the disclosure of litigation funding agreements in court cases so the extent of the practice can’t be fully understood, but U.S. litigation financing advisor Westfleet has said there was $16.1 billion of assets under management in 2024.

Third-party litigation funding (TPLF) contracts are currently structured in a way that allows funders to avoid all or some U.S. taxes on profits. In fact, according to critics of the practice, litigation funders pay less in taxes on their share of the court award than do plaintiffs in the case. The situation is even more favorable for foreign investors, who are said to be able to avoid taxes altogether.

Related: Court Orders Start to Expose ‘Startling’ Data on Litigation Funding Sources

Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies (NAMIC), said for a over a year the industry trade association recognized tax reform as “an opportunity to address a significant problem plaguing our court system at the expense of nearly every industry and consumers.”

“Legal system abuse costs each American household thousands of dollars each year, and third-party litigation funding for profit is a significant driver of those costs.,” Grande said in a statement. “We applaud Senate Republicans for stepping up and doing the right thing to close this tax loophole, which has been weaponized by predatory funders—many of them foreign actors—to the detriment of the U.S. judicial system and more importantly, hardworking Americans.”

Related: Most Americans Want Legal Reforms Against Practices Like Litigation Funding: Survey

The American Property Casualty Insurers Association (APCIA) has similarly made abuse of the legal system, including TPLF, a priority. On this latest measure, Sam Whitfield, APCIA’s senior vice president of federal government relations, told Insurance Journal, “Closing this tax loophole is critical to restoring fairness in the civil justice system and lowering costs. APCIA commends the Senate for supporting sensible legal system abuse reforms and including the legislation in the reconciliation package.”

According to a new consumer guide on legal system abuse from the Insurance Information Institute (Triple-I) and Munich Re US, legal system abuse costs each American family about $6,664 more for goods and services, and costs small businesses $160 billion in tort costs.

Earlier this month, Representative Kevin Hern, R-Okla., introduced HR 3512, the Tackling Predatory Litigation Funding Act. Senator Thom Tillis, R-N.C., has a companion bill in the Senate. The measure also focuses on the tax code, and looks to tax litigation funders’ profits at the individual income tax rate of 37% plus 3.8%.

Topics Lawsuits Mergers & Acquisitions