Did you see
where Don McLean sold his original manuscript for “American Pie” at Christie’s?
He sold the work for $1.2 million, and it included his handwritten notes and
deletions from the 1971-72 hit that – at 8 ½ minutes – was the longest song to
ever top the U.S. charts.
The song of
course is famous for its allusions. The “day the music died” refers to the
death of Buddy Holly, whereas “the king” supposedly refers to Elvis Presley
while “the jester on the sidelines” refers to Bob Dylan after his motorcycle
accident. It became an anthem to disillusionment, to the sense of our best days
being behind us and the ennui and hopelessness of a society being carted off in
the wrong direction.
Sounds
eerily contemporary.
He explained
that he had forgotten he had the manuscript. He found it in the proverbial old
box that had survived several moves. The sale allowed him to provide for his
family, now and into the future.
Yes, $1.2
million will do that.
So what are
the tax consequences from the sale of his manuscript?
We are
talking about intellectual property and a subset we will call creative
properties.
For the most
part, self-created properties cannot be a capital asset in the hands of its
creator. This causes a problem, as one requires a capital asset if one wants
capital gains.
Take it a
step further. If someone else owns the asset but its tax basis (that is, its
cost for purposes of calculating gain or loss) is determined by reference to the
creator’s basis, then it cannot be a capital asset. How can this happen? Easy. You could gift the property,
for example, or you could contribute the property to a family limited
partnership. In either case the recipient will “take over” your basis in the creative
property. Since the basis remains the same, it cannot be a capital asset.
The vocabulary
gets tricky when discussing creative property. For example, an author (say
Stephen King) may receive a “royalty.” Coincidently, find oil in your backyard and
chances are an oil company will also pay you a royalty. Since the word “royalty”
is the same, are the tax consequences the same?
The answer
is no. If you write a book or score a movie soundtrack, that royalty is probably
ordinary income to you. In fact, it is reported on Schedule C of your
individual tax return, the same as your self-employment income from Uber. The
oil royalty, on the other hand, is reported on Schedule E, along with rents.
The Schedule C royalty will trigger self-employment tax. The Schedule E will
not.
OBSERVATION: We have discussed before that sometimes a word will
have different meanings as it travels through the tax Code. Here is an example.
As always,
there are exceptions. Let’s say you write one book and never write again. The
IRS will likely consider that to be ordinary income but not self-employment
income. Why? Supposedly it takes two or more books to establish that you are in
the trade or business of writing books.
OBSERVATION: I am curious how the IRS would apply this standard
to Harper Lee. She published, you will recall, To Kill a Mockingbird in 1960. It was only this year that she
published her second work (Go Set a
Watchman) – 55 years later. What do you think: is this self-employment
income or not?
Remember
when Michael Jackson bought the catalog of Beatles music? He bought it as a non-alternative
investment, akin to stocks and bonds. Like a stock or bond, Michael Jackson
would have had capital gains had he sold the catalog.
This created
a fuss among songwriters. If they sold their own compositions, they would have
ordinary and self-employment income. Introduce Michael Jackson and the tax
result transmuted to capital gains.
So Congress
passed Section 1221(b)(3), which incorporated a provision from the Songwriter’s
Capital Gains Equity Act, promoted by the Nashville Songwriters Association
International (NASI). It extended capital gains to self-created music owned for
more than one year. It requires an election, and the songwriter/creative can elect
for one musical composition and not for another. It does require the transfer
of a musical composition or a copyright in the same; transfer something less
and the result defaults to ordinary income.
NASI argued
that the industry had changed. By the 1990s many music artists were acting as
their own publishers or co-publishers, meaning they had some control over the
exploitation of their songs. Gone were the days of Hank Williams and Bill
Monroe, when songwriters sold their songs outright to music publishers with no right
to ongoing income.
Congress
listened.
Don McLean now has a tax option that he did
not have years ago when he recorded “American Pie.” I suppose that there could
be a scenario where it would be more advantageous to recognize the $1.2 million
as ordinary income rather than as capital gains, but I cannot easily think of
any that do not require low-probability tax considerations.
I would say
he is making the election.
