Much has been written about the recent boom in music catalog sales. The market saw unprecedented deals, with artists such as Paul Simon, Bruce Springsteen, Bob Dylan, Sting and Neil Young receiving hundreds of millions of dollars in rewards. However, 2022 has brought headwinds to the market. With rising interest rates, reduced availability of marquee catalogs, and increased scrutiny from funding partners, some have declared the catalog sale boom to be over.
Despite these pressures and allegations, the basic foundation of the catalog market remains intact. On the buy side, as digital and performance revenues increase year over year and data sources for forecasting and analysis continue to expand, music catalogs have turned into a stable and accessible source of income. On the sales side, catalog sales offer significant tax benefits to artists due to the unique provisions of Section 1221(b)(3) of the Tax Code that allow for capital gains treatment on the sale of self-produced music.
Many catalog deals in the first few years of the Biden administration were made under fears that this tax incentive might soon end, but now, in the face of a post-mid-term divided government, tax laws Instead, the legislative deadlock could make the election of 1221(b)(3) a major driver of catalog sales in the years to come.
Origin of capital assets
When the United States enacted its first income tax law in 1913, it did not distinguish between capital and ordinary income assets. However, without such a distinction, proceeds from the sale of investment properties sporadically imposed higher tax rates and overall taxes on taxpayers than if the proceeds were recognized annually. Congress addressed the issue in 1921 by enacting a law to distinguish between ordinary income and capital gains, and with the exception of a brief period from 1988 to 1990, Congress has applied lower tax rates to capital gains for a century. rice field.
Historically, capital assets were negated as all assets except those specifically excluded that are considered ordinary earning assets, such as assets held for sale to customers in the ordinary course of business (i.e., inventory). defined in terms of Over the years, however, Congress has carved out specific asset classes for capital gains processing in order to facilitate various tax policies.
For example, during World War II, Congress reclassified corporate depreciable assets, allowing manufacturers to receive normal tax credits for losses and capital gains treatment for profits. I made it Similarly, in 1954 Congress granted certain inventors capital he gain treatment on the sale of patents as an incentive to invent.
Musical works as assets
Professional songwriters have historically not been eligible for the capital gains treatment of catalog sales. has determined that it is holding the work for sale to its customers. However, the court ruled that amateur her creators were entitled to Capital Her Gains treatment because their works were not sold to customers on the same regular basis.
This distinction ended in 1950 after then-General Dwight Eisenhower sold the rights to his World War II memoir Crusades in Europe for $635,000 (nearly $8 million today). Eisenhower secured an advance ruling that he was an amateur rather than a professional writer in order to be entitled to the capital gains treatment upon sale.
His resulting tax windfall was sufficient to amend the definition of capital assets in 1950 to specifically exclude not only literary, musical, and artistic works, but all self-made copyrights. infuriated members of parliament. For songwriters, the amendment meant that sales of musical works would no longer be subject to capital gains treatment.
A Lifeline for a Struggling Songwriter
In 2000, various artist groups, including the Nashville Songwriters Association International, began lobbying Congress to enact legislation that would allow songwriters to obtain preferential tax treatment for the sale of their songs. It was the height of his Napster days, and the songwriter’s royalty income was plummeting in the face of peer-to-peer file sharing.
After a six-year campaign, Congress amended Section 1221(b)(3) to allow songwriters to treat catalogs as assets at the time of sale. The economic implications of this provision for songwriters are significant: keep the catalog and pay up to 37% regular income tax on future royalties, or sell it to the highest bidder for a one-time capital gain. Pay taxes at the highest rate. 20%.
Music Catalog becomes Copyright Gold
The election of 1221(b)(3) did not immediately spark a sales boom. At the time, most institutional investors remained wary that the industry was struggling to find a foothold in the digital age. Over the decades that followed, however, peer-to-peer sharing applications were replaced by downloads, with the mass adoption of streaming services.
Music royalty income stabilized and began to show normal year-over-year growth. The same digital technologies that have revolutionized the way society consumes music have enabled labels and publishers to amass data and provide unprecedented insight into the world’s use of music. As a result, songwriter royalties have turned into a predictable revenue stream that sophisticated buyers can plug into predictive models to predict their return on investment.
When the Covid-19 pandemic swept the world in early 2020, musicians accustomed to earning a significant portion of their income from touring were forced to move away from touring. Looking for other sources of income, we found a new market of buyers willing to pay big to replace future royalty income with a significant up-front purchase price. And when they recognized that preferential tax rates were available (up to a 17% spread from the rates most pay on their royalty income), the choice to sell became an easy one. This unprecedented match of interest between buyers and sellers has driven headline-grabbing reports of repeated $100 million catalog sales.
looking forward to it
Without a doubt, we are entering the second act of the music catalog sales boom. Rising interest rates have eased buyer excitement over the song catalog, putting downward pressure on purchase price multiples with it. But the fundamentals that made the boom in the first place remain — good data, solid royalty earnings and forecasts, and, at least until the next election cycle, making changes to Section 1221(b)(3) elections. It’s a legislative impasse. Unlikely.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., publishers of Bloomberg Law and Bloomberg Tax, or their owners.
Author information
Beau Stapleton is a partner of Manatt Entertainment, collaborating with entertainment stakeholders on complex, often cross-industry deals. Stapleton has worked at the intersection of the music, film, television and digital industries.
Brac Ahmed A tax attorney based in Manatt’s Los Angeles office, he is dedicated to advising public and private companies on a variety of accounting and legal matters. With experience in corporate law and tax law, Burak prepares transaction documents on various types of mergers and acquisitions, tax-exempt reorganizations, cross-border transactions, and state and local tax issues.
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