Taxing Nonrecourse Litigation Funding

• In Event: JLTR Conference Part II

Abstract

This paper examines the implications of the recent and growing phenomenon of nonrecourse third-party litigation funding. The proliferating acceptance and use of such funding raises elemental federal income tax issues of characterization and timing both for funding providers and for civil plaintiffs accepting such funding in exchange for an agreement to share the cash proceeds of any settlement or judgment. Explaining and emphasizing the commercial (business-to-business) market for litigation funding as it has evolved, this paper addresses the lack of guidance as to the implicit tax compliance issues by testing optional guidance models that may apply by analogy. It concludes by identifying the single model that should apply and offers a pro forma revenue ruling as a starting point for the government’s further consideration of the issues and early promulgation of administrative guidance.

Author

• John Gamino, Texas State University