Reprinted with permission from the February 2, 2026, edition of the National Law Journal. © 2025 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
In a world of rapid regulatory retreat, civil litigation is an ever-more important tool needed to keep corporations in check. If the government steps out, somebody needs to step in. The work is hard—lawsuits are expensive, and, even when obviously meritorious, often take many years to win. One of the few tools allowing plaintiffs to survive long enough to obtain meaningful relief is third-party litigation funding. It doesn’t level the playing field so much as lessen its significant tilt toward corporate interests.
But for some, a fairer game is no game at all. Sen. Thom Tillis, with the “Tackling Predatory Litigation Funding Act” (S.1821/H.R.3512), introduced last May, seeks to tax litigation funding out of existence. The bill singles out litigation funding for uniquely punitive tax treatment, untethered from ordinary principles of tax law, economic reality, or fairness. The result is legislation that is unfair, dangerous, discriminatory and transparently designed to tilt the table even further in favor of corporate America.
The bill creates an entirely new chapter of the Internal Revenue Code aimed at a single activity: third-party litigation funding. That new chapter writing alone should set off alarm bells. The Internal Revenue Code is not typically used to regulate or suppress discrete industries because certain political constituencies dislike them. Yet that is exactly what this proposed legislation does. It imposes a special tax on “qualified litigation proceeds” received by litigation funders, pegged to the highest marginal individual tax rate, plus the 3.8% net investment income surtax, ensuring that the rate is not only high today but automatically punitive tomorrow if top rates increase. Further, unlike nearly every other area of the tax code, the proposed legislation expressly forbids funders from offsetting gains with losses. Litigation funding, like any portfolio-based risk capital, involves both—some cases succeed, many fail. The Tillis bill, however, pretends that the losses don’t exist. Gains are fully taxable, losses irrelevant.
By way of example: Let’s say there’s a 40% tax rate on litigation funding gains (this is actually slightly lower than the rate that Sen. Tillis, R-North Carolina, proposes), and a hypothetical funder has realized gains of $60 million, against losses of $40 million, meaning it has made $20 million over the course of that year. In any rational world, the funder would pay taxes on that $20 million gain. At a 40% tax rate, that’s $8 million paid in taxes on the $20 million profit, leaving $12 million in net after tax income for the funder. Under Tillis’ proposed legislation, however, the company would be forced to artificially ignore its losses and pay a 40% rate on the $60 million that it earned in gains, or $24 million, turning its $12 million net income into a $4 million net loss.
No serious tax policy expert would defend this approach as neutral or principled. It is taxation by ambush, designed to tax the litigation funding industry out of existence, and a reminder that Chief Justice Marshall was onto something when he noted that it is a “proposition not to be denied” that “the power to tax involves the power to destroy.”See McCulloch v. Maryland, 17 U.S. 316 (1819).
The proposed bill then compounds the problem by imposing entity-level taxation on partnerships and other pass-through entities, overriding longstanding flow-through principles that apply virtually everywhere else in the tax code. And, as if that weren’t enough, the legislation adds a withholding regime requiring parties controlling settlement or judgment proceeds to withhold a substantial portion of payments owed to funders—regardless of whether those payments represent profit, return of capital, or reimbursement—forcing funders into refund and credit battles after the fact. Cash-flow disruption is not the bug here, it’s the feature.
All of this is defended with a familiar, albeit intellectually disingenuous, set of talking points. We’re told that litigation funding encourages frivolous lawsuits, invites foreign influence, and preys on vulnerable plaintiffs. But not one of those claims withstands scrutiny.
Frivolous Litigation. Courts already have robust tools to address meritless claims: pleading standards, dismissal motions, summary judgment, class certification requirements, Daubert motions, sanctions, and fee-shifting regimes where Congress has deemed them appropriate. Litigation funding does not override any of these filters. Funders, who put their own capital at risk, have powerful incentives to back strong cases, not weak ones. The notion that a tax on funding is a substitute for judicial gatekeeping is not just wrong; it is incoherent.
Foreign Influence. The “foreign influence” argument is perhaps the most cynical justification offered (see also Arguing Class Actions, “Manchurian Misdirection—False Fears About Chinese Money in Litigation Funding,” National Law Journal, Oct. 6, 2025). The bill’s supporters invoke the specter of foreign sovereign wealth funds meddling in U.S. litigation, yet the legislation sweeps far more broadly, applying to domestic and foreign funders alike. If foreign government influence were truly the concern, Congress could address it directly and narrowly through disclosure requirements or targeted restrictions in sensitive contexts. Instead, the bill uses “foreign” as a rhetorical accelerant to justify an attack on the entire industry. When a statute cannot be narrowly tailored to its purported rationale, that’s usually because the rationale is pretextual, just as it so very clearly is here.
Vulnerable Plaintiffs. Setting aside the reality that, in many cases, plaintiffs would not be able to file cases at all absent funding, if the concern is abusive contractual terms, excessive returns, or improper control over litigation, those issues can be addressed through disclosure obligations to plaintiffs or the court, ethical rules, or targeted caps in consumer contexts. The Tillis bill does none of those things. Instead, it taxes profits, while leaving untouched the economic leverage that corporate defendants wield through insurance, indemnification, litigation reserves, and virtually unlimited defense budgets. That asymmetry is not accidental. Rather, it’s the point.
Indeed, the most telling feature of the bill is not what it includes, but what it excludes. Plaintiffs are not the only entities that are “funded.” Corporate defendants routinely finance litigation risk through insurance, reinsurance, captives, structured settlements, and complex financial products designed to smooth risk and reduce exposure. No one proposes a bespoke punitive tax regime for those tools. Only the financing mechanism most often used by plaintiffs—particularly in class actions, mass torts, antitrust, and complex commercial cases—is singled out for special punishment. As Vanderbilt professor Brian Fitzpatrick has observed, this is discrimination that helps big business, since those business interests nakedly benefit from plaintiffs being forced to take low-ball settlements. That conclusion follows not from ideology, but from structure.
The practical consequences of this legislation are easy to predict and impossible to defend. By raising the cost of capital and distorting risk-reward calculations, the bill will reduce the availability of funding for plaintiffs’ cases. Funders who remain will demand worse terms to compensate for the artificial tax burden, reducing net recoveries to plaintiffs. Some cases—particularly complex, resource-intensive matters against well-funded defendants—will never be brought at all. Others will settle prematurely and cheaply because many plaintiffs will not be able to afford to stay in the fight.
Who benefits from that world? Corporate defendants who rely on delay and attrition as a litigation strategy. Defendants who can bury plaintiffs in discovery, motions, and appeals until financial exhaustion sets in. Defendants for whom delay is not a cost, but a weapon. That’s not mere speculation; rather, it’s the lived reality of complex litigation.
This is why the Tillis bill is dangerous not only as policy, but as a structural intervention in the civil justice system. It doesn’t change substantive law, nor does it alter standards of liability or proof. Rather, it changes outcomes by changing who can afford to litigate and raises the lending bar in an intentional attempt to chill the funding markets and freeze plaintiffs and their counsel out. That kind of indirect manipulation should concern anyone who cares about access to justice, even if they dislike litigation funding as a business model.
To be sure, it’s not at all clear that the proposed legislation is even constitutional. While Congress enjoys broad latitude in taxation, that power is not limitless when used as a tool of targeted suppression—to quote Chief Justice John Marshall again, to carry taxation “to the excess of destruction, would be an abuse, to presume which, would banish that confidence which is essential to all government.” When a tax is crafted not to raise revenue neutrally, but, rather, to cripple a particular activity closely tied to the exercise of constitutional rights—here, access to courts, the right to petition, and a plaintiff’s choice of counsel—courts are entitled to look past labels and examine function. At a minimum, the Tillis bill invites equal protection and due process challenges by singling out one form of investment for uniquely hostile treatment without coherent justification.
It’s telling that proponents of this spurious legislation attempted to cram this measure through the budget reconciliation process as a “revenue raiser,” only to have it rejected on procedural grounds. That maneuver underscores what this bill really is: a substantive reordering of the civil justice landscape disguised as tax policy to avoid open debate about its consequences. The fact that it failed once doesn’t mean it won’t return in another form. Corporate lobbying efforts rarely disappear; they regroup.
At bottom, the Tillis proposal rests on a deeply flawed premise: that the problem with our civil justice system is too much accountability, too much enforcement, and too much access to justice for plaintiffs. The opposite is far closer to the truth. For decades, corporate defendants have invested heavily in making accountability expensive, slow, and uncertain. Litigation funding emerged not as a distortion of justice, but as a market response to that reality—a way to allow meritorious claims to be pursued despite asymmetric resources. Taxing that response out of existence doesn’t make the system fairer, it makes wrongdoing cheaper. When enforcement becomes harder, deterrence weakens. When deterrence weakens, misconduct proliferates. That’s not ideology; it’s basic economics.
If Congress wants to protect consumers, it should protect them from fraud, anticompetitive conduct, discrimination and abuse—not from the capital that allows those wrongs to be challenged. If Congress wants transparency, it should legislate transparency. If it wants to address foreign influence, it should do so honestly and narrowly. What Congress must not do is weaponize the tax code to sabotage plaintiffs’ access to justice, all while pretending to act in the public interest.
Adam J. Levitt is a founding partner of DiCello Levitt, where he heads the firm’s class action and public client practice groups. He can be reached at alevitt@dicellolevitt.com.
Thank you to DiCello Levitt partner Dan Schwartz for contributing to this column.
