What happened: U.S. Sen. Thom Tillis (R-NC) and U.S. Rep. Kevin Hern (R-OK) have introduced a proposal to close a tax loophole that allows foreign litigation funders to avoid paying taxes on proceeds from lawsuits against U.S. companies.

Tell me more: Third-party litigation funding has surged as global investment funds pour billions into U.S. lawsuits, often with questionable merit, seeking high returns from massive settlements or jury awards. 

By the numbers: In 2023, 39 investors committed approximately $15.2 billion to commercial litigation in the U.S.

• Litigation funders see average annual returns of 25%, fueled by large settlements and jackpot jury verdicts.
• Foreign investors currently pay zero U.S. taxes on lawsuit proceeds, since those earnings are treated as capital gains and exempt under current tax law.
• The average American household bore $4,200 in litigation-related costs in 2022, according to the U.S. Chamber of Commerce.
• The Tillis-Hern proposal would tax all litigation funders—foreign and domestic—at the ordinary income rate of 37%, plus a 3.8% surcharge, closing the existing loophole.

TLR Thoughts: The loophole in the tax code benefits entities that fuel costly, abusive litigation rather than investing in innovation and job creation. The Tillis-Hern provision preserves access to the courts for legitimate claims while ending unfair tax advantages that encourage predatory lawsuits and undermine U.S. businesses.

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