James Carter, Principal and Policy Director at Navigators Global, has called for Congress to address a tax loophole that allows foreign litigation funders to profit from U.S. cases without paying taxes. He argued in an op-ed that closing this loophole would generate federal revenue.
"Congress can close the tax loophole that allows foreign litigation funders to extract returns from the U.S. legal system without paying U.S. tax," said Carter, Principal and Policy Director, Navigators Global. "The current tax treatment of third-party litigation funding, particularly when structured as prepaid forward contracts, creates a clear and perverse policy mismatch. Correcting this loophole would promote tax fairness, reduce harmful incentives, and generate offsetting revenue which could be used to fund a Tax Cuts and Jobs Act extension. Closing this loophole would generate new federal revenue at a moment when Congress must consider how to pay for any extension of the Tax Cuts and Jobs Act."
According to the U.S. Chamber Institute for Legal Reform, third-party litigation funding has become a multi-billion-dollar industry in the United States, attracting investments from both domestic and foreign entities. These investors finance lawsuits in exchange for a share of any resulting settlement or judgment. The practice has raised concerns over transparency, national security risks, and increased litigation costs for businesses and consumers.
PR Newswire reported that the U.S. commercial litigation finance industry saw $2.3 billion in new capital commitments from mid-2023 to mid-2024, despite a contraction in available funding. This represented a 16% decrease from the prior year and nearly 30% below 2022 levels. Industry participants managed $16.1 billion in assets across 42 active capital providers during the same period.
DLA Piper noted that the Joint Committee on Taxation estimates closing the tax loophole allowing foreign litigation funders to avoid U.S. taxes would generate $3.5 billion in federal revenue over ten years. This revenue could help offset costs tied to extending provisions of the Tax Cuts and Jobs Act. The change would specifically impact foreign funders currently profiting from U.S. litigation without paying U.S. taxes.
Carter has served as Principal and Policy Director at Navigators Global since 2017, advising clients on federal policy and strategic engagement. He was Assistant Secretary of the U.S. Department of the Treasury from 2002 to 2006, overseeing economic policy and regulatory matters. Carter also held senior staff roles in the U.S. Senate and spent nearly a decade as vice president of government affairs at Emerson, a Fortune 200 global manufacturing and technology company.
