ILFA and Litigation Law Firms Align on Punitive Tillis Tax Bill on Trial Lawyers and Their Clients

June 18th, 2025

The Senate version of the “One Big Beautiful Bill Act” (H.R. 1) (Senate Finance Committee Press Release) contains a proposal, buried nearly four hundred pages into the text, that would amend the Tax Code with severe consequences for litigation-focused law firms. The amendments would impose a super-tax on profits derived from litigation proceeds at 40.8%—nearly two times the generally applicable corporate tax rate of 21%. The tax would apply to pass-through entities—which pay no taxes under any other provision of the Tax Code. This tax would apply to profits generated by any commercially reasonable law firm loan that looks to contingency fees for security or repayment.

Law Firms Would Bear Onerous Administrative Burdens—Even Those That Take No Outside Financing

  • The bill would saddle any litigation law firm—even those with no loans—with impossible administrative obligations related to handling litigation proceeds.
    • Specifically, the proposal purports to require anyone in possession or receipt of any litigation proceeds (including any lawyer) to withhold 50% of those proceeds that might be paid to any client or co-counsel that has a loan above the above-referenced 7% rate.
    • Failure to comply with this holdback obligation—even in respect of financing received by a client of which the attorney is unaware—would cause the attorney (or law firm) to become liable for the 40.8% tax.
  • If implemented, this would make the administration of settlements practically impossible and result in every law firm that co-counsels a case or has a client with a loan (known or unknown), needing to withhold 50% of the proceeds it receives, for fear of failing to withhold a co-counsel’s or client’s tax and becoming liable for that tax.

The Proposal Would Severely Limit Access to Outside Financing for Litigation Law Firms:

  • Lenders would be forced to pay a super-tax rate of 40.8% on profit generated by loans to litigation-focused law firms.
    • The only exclusion is for loans made at or below 7% or twice the average 30-year Treasury rate over the prior year (currently, approximately 8.8%).
  • This would disrupt all forms of lending to essentially any law firm.
  • Worse, the bill would impact how lawyers finance their own businesses.
    • Its sweep encompasses shareholder loans made by law firm partners make to their own businesses, because it has no carve-outs for investments that lawyers make personally to finance their own practices.

This Bill Is a Direct Attack on Litigation Law Firms and the Corporate and Insurance Lobby’s Dream

  • Simply put, this proposal is a brazen attempt to enact federalized tort reform in disguise:
    • It will have draconian impacts on all law firms that rely on contingency fees for even a portion of their revenue, not just “litigation funders.”
  • If this proposal is enacted, outside funding for litigation-focused law firms will be nonexistent because the penal tax rate will make it entirely uneconomic to lend.
  • Lawyers will even be constrained in funding their own businesses, with their own money, without incurring severe tax liabilities.
  • As a result, plaintiffs’ law firms will struggle to fund their businesses, will be forced to turn down clients with strong and meritorious claims, and justice will be denied.

This is precisely what the corporate and insurance lobby wants, but they don’t want litigation attorneys to notice that it is happening.