When I read in the Wall Street Journal that Bob Dylan had sold his entire songwriting catalog, I immediately wished that I had been in on the tax planning for that. Here is the press release from Universal Music Publishing.
Sir Lucian Grainge, Chairman and CEO of Universal Music Group, said, “As someone who began his career in music publishing, it is with enormous pride that today we welcome Bob Dylan to the UMG family. It’s no secret that the art of songwriting is the fundamental key to all great music, nor is it a secret that Bob is one of the very greatest practitioners of that art. Brilliant and moving, inspiring and beautiful, insightful and provocative, his songs are timeless—whether they were written more than half a century ago or yesterday. It is no exaggeration to say that his vast body of work has captured the love and admiration of billions of people all around the world. I have no doubt that decades, even centuries from now, the words and music of Bob Dylan will continue to be sung and played—and cherished—everywhere.”
Yeah, yeah that’s nice, but how much was involved and how was the deal structured? Apparently, UMG is a subsidiary of Vivendi, a French media conglomerate. I haven’t been able to find the details, although some reports seem to imply it was a cash deal. And the New York Times reports an estimate of $300 million.
From Fourth Street To Nashville
I tend to associate Dylan with Greenwich Village and folk music. I am not an envious person, but how can you not envy somebody who had a relationship with Joan Baez? Too bad I was only thirteen when they broke up in 1965. Regardless, Greenwich Village and folk is just one aspect of Dylan. In 1969 he released Nashville Skyline.
As a music, culture critic I make a pretty good tax researcher, so I’ll leave it there. Except. Except. It turns out that it was his Nashville friends who might be saving him tens of millions in taxes this year.
Capital Gain!
There was something that I should have known that I didn’t learn until prompted by my editor Janet Novack. Assuming this is a straight-up cash deal Dylan will get capital gains treatment on the sale. This is due to one of those odd exceptions to an exception in the Code. Code Section 1221 defines capital assets very broadly, A capital asset is “property held by the taxpayer” in other words just about everything that can be owned fits the basic definition in 1221(a), which then goes on to tell us all the things that are not capital assets.
1221(a)(3) excludes “a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by a taxpayer whose personal efforts created such property“. So there go all Dylan’s songs. Unless he was a front man for somebody whom he secretly paid to write them, they would not be capital assets. But there’s more.
1221(b)(3) gives us – Sale or exchange of self-created musical works – At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3). According to the regulations, the taxpayer makes the election for each work on a timely filed, including extensions, return for the year of the sale. I thought that would make for an awful think return, but the election is made by reporting the sales as capital sales.
Why That Exception?
The exception for musical works was added by the Tax Increase Prevention and Reconciliation Act of 2005 (passed in 2006). It was a temporary measure expiring on January 1, 2011, but was later made permanent. I haven’t found a lot about the rationale for the provision. There is this from an article – The History of Intellectual Property Taxation: Promoting Innovation and Other Intellectual Property Goals by Xuan-Thao Nguyen and Jeffrey A. Maine:
Ironically, the 1950 law, which was designed to treat all copyright creators the same, was later viewed by some-particularly members of the country-music industry-as quite harsh to songwriters. Because the average annual income of songwriters was quite low and often came in spurts, some thought the taxing of gains realized from song sales should differ from the taxing of compensation earned by wage earners. In response, in 2006, Congress amended the 1950 law, creating an exception for sales of musical compositions and copyrights in musical works. Under section 1221(b)(3), songwriters can elect to pay tax at capital gain rates rather than ordinary income rates on the sales of their copyrighted songs. Although this exception was pushed to remove perceived tax inequity facing songwriters, it could more accurately be viewed as a response to assiduous lobbying efforts by the music industry.
Joel S Newman has more in Sales And Donations of Self-Created Art, Literature, and Music in the Pittsburgh Tax Review.
Country western songwriters were not happy with the provisions of § 1221(a)(3). In the early 2000’s, the Nashville Songwriters Association International (NSAI) lobbied the Tennessee and Kentucky Congressional delegations for a change. Congresswoman Blackburn, the head of the House Congressional Songwriters Caucus, was especially active Proposed legislation was drafted by Denise Stevens, of Loeb & Loeb in Nashville, working pro bono for the NSAI. The NSAI lobbied hard for the bill. NSAI singer-songwriter members paid their own way to Washington and took turns performing their music for members of Congress. Sometimes, at these “guitar pulls,” the members of Congress sang as well. As a result, in 2005, Congress enacted the Songwriters Capital Gains Tax Equity Act, as part of the Tax Increase Prevention of Reconciliation Act of 2005.
Jean Anne Naujeck had a story in the Tennessean on February 6, 2004, about forty Nashville songwriters who paid their own way to Washington to drum up support for the bill.
John Darby tells a pretty good version of how the bill came to pass in The Tall Tax Tale of Why Country Songwriters Get Capital Gain Treatment. He makes one comment that Dylan may have upended:
The only conceivable defense for this strange and lopsided tax benefit is that the stakes appear to be quite small. Once source estimates that this tax break will cost the U.S. government just $4 million per year in lost tax revenues/ while the Joint Committee on Taxation puts the revenue loss at $29 million over the ten years from 2007 to 2016.
Dylan may have used up more than a decade’s worth at that rate if the New York Times report that the deal was around $300 million is correct.
According to this story, the benefit might have gone away as part of TCJA, but a couple of Tennessee representatives, Diane Black and Marsha Blackburn, were on the ball in preventing that.
A Little Noted Dylan Cover
Dylan’s reach was really amazing. Sister Kathleen Reilly, who was a year younger than Dylan, told me that when the older nuns at the Pallotine motherhouse in Harriman, NY were upset about various things that were different from the good old days of habit wearing, the younger nuns would break into a chorus of The Times They Are A Changin‘.
You have to wonder whether anticipation of a new administration with a different view of capital gains was a spur to getting this deal done.
Recognizing an enormous capital gain is not exactly the epitome of great tax planning. So there may be something else going on. It would be really interesting if Dylan kicks the can down the road with some opportunity zone investments. It takes a lot of nerve, but I can’t help but point out that there is an OZ in the East Village that positively contains a stretch of Fourth Street.