Tackling Predatory Litigation Funding Act

Exemption for Small-Scale Funding: The bill includes an exception where the tax does not apply if the total amount of funds for an individual civil action is less than $10,000 (Section 2, Sec. 5000E-2(3)(C)(i)).

Exemption for Specific Loan Repayments: A third party may avoid the tax if their right to receive proceeds is limited to the repayment of the principal of a loan, or the principal plus interest at a specific capped rate (Section 2, Sec. 5000E-2(3)(C)(ii)).

Exemption for Attorney Fee Reimbursement: The tax does not apply to agreements where the third party's right to receive proceeds is limited to the reimbursement of attorney's fees (Section 2, Sec. 5000E-2(3)(C)(ii)).

Tax Burden on Third-Party Entities: A tax is imposed on any "covered party"—such as an individual, corporation, or partnership—that receives funds through a litigation financing agreement (Section 2, Sec. 5000E-1(a) and Sec. 5000E-2(2)).

High Tax Rate: The tax rate is calculated as the sum of the highest rate of tax imposed by section 1 plus an additional 3.8 percentage points (Section 2, Sec. 5000E-1(b)).

Taxation of Pass-Thru Entities at the Entity Level: For partnerships, S corporations, or other pass-thru entities, the tax is applied directly at the entity level (Section 2, Sec. 5000E-1(c)).

Withholding Requirements for Parties and Law Firms: Any person who has control or custody of proceeds and has entered into a financing agreement must deduct and withhold 50 percent of the applicable tax percentage from the payments made to the third party (Section 2, Sec. 5000E-3(a)).

Liability for Failure to Withhold: If a person fails to deduct and withhold the required tax, they may be held liable for interest or penalties (Section 2, Sec. 5000E-3(a)(3)).