Sale of Intellectual Property

[Dave T]

Not that I have a client in a similar situation, nor do I expect to, but I was just wondering about this.

This morning I heard Bruce Springsteen sold his music catalog for $500 million and was thinking about what are the tax consequences of this?

 

[Lee B]

Capital Gains and Net Investment Income Tax

[PatHack]

I have not done extensive research, but I thought it would be taxed as ordinary income.

 in 1950 Congress amended the definition of capital asset to include the section 1221(a)(3) exception for self-created copyrights and similar property. According to the House report to the Revenue Act of 1950, “When any person sells an invention or a book or other artistic work which is the product of his personal effort his income from the sale is taxed as ordinary income, . . . (even if it was) the first time he may have engaged in such a trade or business.” The logic behind this is that the creator of a copyright is being compensated for labor, which should be taxed at ordinary rates.

[Dave T]

Apparently this has become more popular in the music industry lately with  such as Bob Dylan, Paul Simon and others selling their catalogs for very large sums.

I wondered if indeed it is capital gain, how would basis be determined?

 

 

[Medlin Software, Dennis]

I remember reading some sort of article on this trend, something about estate planning and favorable laws at present vs what is coming/expected in the future.

[Lee B]

On 12/16/2021 at 12:08 PM, cbslee said:

Capital Gains and Net Investment Income Tax

I just read that self created property is taxed as ordinary income. However when you have a band and record music in a studio,

have all of those expenses been already deducted or have some of those costs been been capitalized?

If you pay a songwriter xx,xxx for a song is that payment deducted or capitalized?

[DANRVAN]

17 hours ago, cbslee said:

self created property is taxed as ordinary income.

There is a special rule for musical works under sec 1221(b)(3) that allows for an election of capital gains treatment.   The election process is spelled out in reg 1.1221-3.

The special rule came about from the lobbying efforts of song writers and was wrote into law under TIPRA of 2005.  They didn't think it was fair to pay ordinary tax rates while an investor could purchase their works and resale as capital gains.  

17 hours ago, cbslee said:

have all of those expenses been already deducted or have some of those costs been been capitalized?

Probably already deducted since writers, artist and photographers are exempt from capitalization under sec 263(h).

19 hours ago, Dave T said:

, how would basis be determined?

by capitalized cost, if any.

[PatHack]

Danrvan. Good leg work. My bad for not digging for the exception. Tax laws are funny that way.

[DANRVAN]

38 minutes ago, PatHack said:

Tax laws are funny that way.

The exception was on the chopping block of the original Trump House tax proposal.

Also the $1 million capital gain ceiling Biden proposed would have hit Springsteen with $499 million taxed as ordinary income.

A never ending saga!

[Catherine]

Fair, as applied to taxation rules and regs.

Strange but intriguing concept!