With the pending passage of the Tax Increase Prevention and Reconciliation Act of 2005, Congress is set to temporarily correct the disparate and inequitable tax treatment applied to songwriters, who sell their catalog of musical compositions, created by such songwriters. A songwriter who creates an original musical composition and "fixes" that work in a tangible medium of expression (e.g., writes down the notation of the musical composition or records the musical composition, etc.) owns the copyright in the musical composition. In the early days of American popular music, most songwriters assigned 100 percent of the copyright in their original musical composition to professional music publishers. The publisher contractually agreed to pay the songwriter 50 percent of the monies received by the publisher from the sale of records, public performance or printed copies of the musical compositions. Traditionally the songwriter's 50 percent of the royalties paid by the publisher has been taxed as ordinary personal income. In the 1960s, self-contained musical groups and many songwriters elected to "self-publish" and retained 100 percent of the copyright in their musical compositions. Alternatively, they entered into a co-ownership arrangement with publishers and assigned 50 percent of the songwriter's copyright interest in the musical composition to the publisher. The music publisher's copyright portfolio (i.e., a catalog) and the musical compositions acquired by the publisher received capital gains treatment whenever the publisher sold its rights in the catalog or its rights in an individual composition. The songwriter, however, did not receive capital gains treatment when his or her copyright interest in the musical composition was sold by the songwriter. The purchase price received by the songwriter for the sale of either the 100 or 50 percent interest in the copyright has been treated as ordinary income and taxed accordingly. The Tax Increase Prevention and Reconciliation Act of 2005 will temporarily end the disparate and inequitable treatment for songwriters whenever they sell all or a portion of the copyright in a musical composition. The Act provides that the sale or exchange of musical compositions or copyrights in musical works created by a taxpayer's personal efforts will be treated as the sale or exchange of a capital asset. Thus, the purchase price received by the taxpayer songwriter for copyrights held for more than a year by the taxpayer songwriter will receive long-term capital gains treatment for taxation purposes, which is presently 15 percent. Such capital gains treatment is effective for sales or exchanges occurring in the tax year beginning after the date of enactment (generally Jan. 1, 2007 for individuals) and occurring before Jan. 1, 2011. Finally, royalties and advances against royalties received by songwriters from music publishers will continue to be treated as ordinary income for taxation purposes. For more information, please contact Casey Del Casino, Leigh Griffith or any other member of Waller Lansden's Intellectual Property Practice or Tax Practice at (615) 244-6380. The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.