Litigation funding dodges tax bullet in Big Beautiful Bill

In "Litigation funding deals could get uglier under 'Big Beautiful Tax Bill'," I recently described a controversial part of the then-pending tax bill that was roiling the litigation funding industry. An enormous excise tax proposed on funding proceeds -- including tax withholding by lawyers -- was causing some lawyers and litigation funders heartburn, perhaps, even, sleepless nights.

However, as the sausage was being made, the excise tax morphed materially. First, the Senate bill proposed to reduce the withholding rate to 15.9%. That would have meant that, under a typical gross-up provision, a law firm would have been contractually obligated to increase its payments to the funder by 18.9%. That was an improvement over the 25.6% that would have been necessary under the House bill.

Significantly, the Senate version also changed the amount to which the withholding rate would apply. The original Tillis bill required withholding on the full gross amount of each payment to the funder. The updated Senate bill required withholding only on the amount representing "qualified litigation proceeds," which is defined as the funder's profit from the transaction.

However, the bill just sent to President Trump's desk after passing both the House and Senate does not include the litigation funding excise tax provision. The Senate parliamentarian ruled that the new litigation funding tax could not be included in the reconciliation process because it was a regulatory provision with only incidental revenue effects. So, the provision is probably dead for now.

Even so, some funders have already said they expect the provision in one of its guises to rear its head again in future legislation. The excise tax on funders -- with withholding tax enforcement on lawyers -- was intended in part to curb litigation. A long list of companies was firmly behind the proposed tax, and some have powerful lobbyists. Therefore, beautiful or not, stay tuned.