The History of the Songwriters Capital Gains Tax Equity Act
Bob Dylan’s sale of his massive, multimillion-dollar songwriting catalog to Universal Music Publishing put the spotlight back on an obscure tax provision that gives successful songwriters of all musical genres something to croon about.
As we explored in last month’s post, this provision allows songwriters to claim favorable capital gains treatment when they sell a catalog of their work instead of being taxed at ordinary (and significantly higher) income tax rates like most artists with royalty income.
Credit for this tax perk goes to the Songwriters Capital Gains Tax Equity Act, which amended the tax code in 2006 to define self-created musical works or copyrights in musical works as capital assets eligible for capital gains tax treatment.
Taking advantage of this loophole allows hit-making songwriters to benefit from lower capital gain tax rates at 20 percent without getting whacked by the double whammy of a higher income tax rate and self-employment taxes—a scenario that could potentially eat up nearly half of their income, according to the Nashville Songwriters Association International (NSAI), which lobbied incessantly for the passage of the act.
Just two stipulations apply: Songwriters must sell the royalty stream on a group of songs (aka, song catalog) to qualify for the provision. They are also required to report each work as a sale or exchange of a capital asset on a timely filed return for the year of the sale.
Copyright Treatment Under the Eisenhower Rule
Like all chart-topping country ballads, the history of this particular tax perk starts with a good story. It dates back to 1950, when Congress decided that copyright creators, such as writers, artists, composers, etc., should be treated the same and income from the sale of their works should be taxed just like wages earned by the average worker. That led to a provision in Section 1221(a)(3) of the tax code that excluded intellectual property, including literary, musical. and artistic compositions, from being defined as a capital asset.
The impetus for this rule sprung from a controversy involving President Dwight Eisenhower. After World War II, the general wrote the Crusade in Europe, a book recounting his experiences as commander-in-chief of the Allied forces. At the time, case law treated books written by professional authors as “inventory” subject to ordinary income tax. In contrast, works by amateur authors were deemed self-created capital assets that generated capital gain. In characterizing himself as an amateur author, Eisenhower was able to claim capital gains treatment on the sale of his book rights. Though the IRS backed his assertion, Congress did not approve of the general’s windfall and subsequently enacted the Eisenhower Rule, which not only eliminated distinctions between amateur and professional authors but also classified all income from the sale of copyrights as ordinary.
Songwriters Lobby for Tax Relief
Fast-forward to more than a half-century later, when Congress added an exception to the Eisenhower Rule in Section 1221(b)(3), allowing songwriters to treat the sale or exchange of a self-created musical work or copyright as a capital gain or loss. So how did these troubadours convince legislators that they deserved a special tax break? Let’s just say they tugged at their heartstrings. The inspiration for the Songwriters Capital Gains Tax Equity Act began with the NSAI, which argued that the Eisenhower Rule was particularly harsh to songwriters, who often labored for years at their craft before scoring any big hits and earned an erratic and often meager income in the meantime.
“Previously, when a songwriter sold a catalog they paid ordinary income taxes and self-employment taxes that could amount to more than 40% of their income from the sale,” notes NSAI on its website, calling the landmark legislation “a matter of fairness for the American songwriting profession.”
With a limited budget for lobbying, NSAI rounded up the best advocates for pleading its case: the songwriters themselves. Groups of them loaded up on buses with their guitars and traveled to Washington D.C., meeting with lawmakers about their need for tax relief and performing for them in a ploy to win their support. They targeted legislators from Southern states in particular, along with members of House and Senate tax-writing committees. After hundreds of visits to Capitol Hill during legislative sessions in 2005 and 2006, their tenacity paid off when Congress passed the Songwriters Capital Gains Tax Equity Act (originally drafted by the NSAI). It didn’t hurt that the legislator introducing the bill, Kentucky Representative Ron Lewis, happened to be a country-music fan and guitarist.
Initially, the provision, which was rolled into the larger Tax Increase Prevention and Reconciliation Act of 2005, was set to expire in 2011, but it has remained in place. It was nearly repealed a few years ago as part of the 2017 tax reform bill before Tennessee legislators stepped in to save it from the chopping block.
New Administration, New Capital Gains Rules?
Though country music songwriters and execs initiated this special tax perk, the provision applies to songwriters of all genres. So why hasn’t it been extended to writers and artists in other fields? It may be because the stakes for this songwriter-specific tax break are fairly low, with the Joint Committee on Taxation estimating a total cost of $29 million in lost tax revenues in the decade since the provision was enacted.
What will become of this tax perk in the future remains to be seen. President Biden’s proposed tax plan includes new rules for capital gains. Under his plan, taxpayers whose income exceeds $1 million would be subject to the same tax rate on long-term capital gains as they pay on wages. For songwriters selling catalogs worth millions, this could mean a substantial tax hike. We are keeping a close eye on these potential tax policy changes and are here to provide songwriters in Nashville and beyond with the best advice for keeping their tax burden low and their earnings high.
Admin | 05/20/2021