Category: Songwriter News

Blowing up the Compulsory in Washington DC

There is loose talk these days about something called “blowing up the compulsory” license for songs in the US under Section 115 of the Copyright Act. This is odd. It is particularly odd given that a lot of the same people now trying to find a parade to get in front of were the very people who championed–barely five years ago–the bizarre and counterintuitive Title I of the Music Modernization Act (aka the Harry Fox Preservation Act). Title I was the part of the MMA legislation that created the Mechanical Licensing Collective and invited Big Tech even further into our house. (Don’t forget there were other important parts of what became the MMA that were actually well thought out and helpful.)

The geniuses who came up with Title I are also the same people who refused to include artist pay for radio play in the package of bills that became the sainted MMA back in 2018. So at the very least before anyone takes seriously any plan to “blow up the compulsory”, the proponents who want buy-in on that change in policy can get right with history and atone by declaring their support–vocal support–for artist pay for radio play. This would be supporting the American Music Fairness Act recently introduced in this Congress by our allies Senator Blackburn and Rep. Issa and their colleagues.

It is important to realize that “blowing up the compulsory” cannot be a shoot-from-the-hip reaction to Spotify taking advantage of the gaping bundling loophole left wide open in the highly negotiated streaming mechanical settlement under Phonorecords IV. There are too many factors in that big a shock to the system. Songwriters around the world should not get caught up in throwing toys out of the pram along with 100 years of licensing practice just because they made a bad deal. This is particularly true given that the smart people handed over the industry’s bargaining leverage against Big Tech as part of the MMA debacle in return for what? Allowing Spotify’s public stock offering to go forward on schedule? Another genius move by the smart people. I wonder what they got out of that deal? I mean this stock offering, you know, the one that made Daniel Ek a billionaire:

A good thing we didn’t let another MTV build their business on our backs.

It is also important to recognize the obvious–the compulsory is not really a compulsory, it’s a compulsory in the absence of a negotiated direct agreement such as the one that Universal recently made with Spotify. Copyright owners have always been free to make direct deals with music users. The compulsory is not just a license, it is also a compulsory rate that casts a long commercial shadow over even the big industry negotiations and certainly over rates in the rest of the world.

And for reasons of historical accident those rates are not determined in Nashville, or New York, or Los Angeles, or even Austin, but rather in Washington, DC in front of the Copyright Royalty Board–an agency that itself is on pretty shakey Constitutional grounds after a Supreme Court decision in the 2020 Term. So if we’re going to “blow up the compulsory”, maybe a good place to start is not having lobbyists make these decisions.

Even if the former opponents of artist pay for radio play come to their senses and support fundamental fairness for artists, that’s just a good start. We have to acknowledge that “blowing up the compulsory” is not going to be well received by the streaming services for starters. (Not to mention the labels.) Those would be the same streaming services that the smart people invited into our house by means of underwriting the costs of the Mechanical Licensing Collective.

I don’t know how others feel about it, but I for one am not inclined to go to the mattresses to assuage the multimillion dollar whiplash that the services must feel. We should understand that Big Tech are being asked to abandon their intensely successful lobbying campaign that led songwriters and publishers right down the garden path with the MMA. Not to mention the millions they have spent creating the MLC so the MLC could pass through some of those monies to HFA.

Before Congress goes along with blowing up Title I of the MMA, they’re probably going to want an explanation of why this isn’t just another fine mess in a long string of fine messes. That will probably involve a study by the Copyright Office like the one the Office was asked by a songwriter to conduct as part of the MLC’s five year review (but declined to undertake at that time). Fortunately that five year review is still dragging on over a year after it started so this would be a perfect time to launch that study. Perhaps Congress will instruct them to do so? At this rate, it will be time for a new five year review before the first one gets completed, so as usual, time is not a factor.

Even if the services and Congress would go along with “blowing up the compulsory” what does that mean for the MLC and the sainted musical works database? Remember, the lack of a database was the excuse that services relied on for years for their sloppy licensing practices. The database was the fig leaf they needed to avoid iterative infringement lawsuits for their failure–or the failure of the services outside licensing consultants.

It also must be said that the services were invited by the same smart people to spend millions on setting up the MLC. In fairness they have a right to get the benefit of the bargain they were invited to make by the same people who now want to blow it up. Or get their money back. Plus they have to like the leverage they were handed to go to Congress and complain, and complain quite believably with great credibility.

And perhaps most important of all is what happens to the $1.2 BILLION in publicly traded securities that the MLC announced on their 2023 tax return that they are (or at least were) holding in their name? Does that get blown up, too?

Songwriter Catalog Sales and Unrealized Capital Gains

If you’e been reading along at home, you may be aware that there is an extensive tax proposal from the Biden Administration on the table. The President previewed his tax proposal in the 2024 State of the Nation and documented it in the form of .the President’s 2025 budget and concomitant tax plan. It’s hard to know with certainty as of this writing, but it appears that Vice President Harris supports the President’s tax plan at least according to sources like Morningstar and may have adopted it in her campaign. I guess we’ll find out eventually.

Among other things, part of the proposal is to institute a new wealth tax by means of a new tax on something called “unrealized capital gains.” This means you pay tax on a paper gain from an asset like your home, artwork, or shares of stock regardless of whether you sold the taxed asset and had (or “realized”) gains from the sale. Those taxed assets may include the sale of a song or sound recording catalog.

Of course, if unrealized capital gains are taxed by the federal government, we have to imagine that the 41 states which tax capital gains at the state level will join in, starting with California and New York. Federal and state capital gains tax will be very complex. Commentators believe this idea is likely to have a host of unintended consequences.

Liquidity and Valuation Problems

The two biggest problems with this concept of taxing unrealized gains are liquidity of the taxpayer to actually pay the tax and how to determine the value to be attributed to the taxable asset in order to calculate that tax in the first place. If the proposal becomes law, we can see that there will be cottage industries in tax loans and valuation experts.

If you’re not familiar with the vernacular, “realized gains” means you made money on the sale of an asset and thus have the money to pay the tax at the time the taxed asset is sold (or gains are “realized”). You may also be able to take that cost into account when determine a selling price. Alternatively, “unrealized gains” means you have to pay the tax without selling the asset. That tax payment must come from somewhere; likely other liquid cash (or you may in the end have to sell the taxed asset in order to pay the tax on unrealized gains that were levied before you sold–and would have to pay tax on the sale and so on and so on). This is the liquidity problem with the idea of taxing unrealized gains.

So if you have a song catalog and the new tax covers intangible assets like songs (or patents for that matter), you have to pay taxes as you go if you are a taxpayer subject to the unrealized capital gains tax. It’s unclear whether it is Constitutional to tax an unrealized gain. (For “realized” interpretation see Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955) which holds that income is realized whenever there are “instances of [1] undeniable accessions to wealth, [2] clearly realized, and [3] over which the taxpayers have complete dominion.”).

Remember, the sale of song catalogs is generally given capital gains treatment under Section 1221(b)(3) of the Internal Revenue Code. This provision permits songwriters to treat revenue from the sale of their self-created musical works as capital gains rather than ordinary income. This means that the profits from catalog sales are taxed at the lower capital gains tax rate, instead of the much higher ordinary income tax rates. If the unrealized gains proposal is applied to song catalogs, it goes even further than taxing at ordinary income rates on the realized gains from a sale–there doesn’t even need to be a sale.

Origins of the Billionaires Minimum Income Tax

I flagged a version of this new tax that was floated by Artist Enemy Number 1 Senator Ron Wyden back in 2019, but his “Billionaire’s Income Tax” bill has now been refined into an explicit budget proposal by the Biden Administration. Like most unpopular tax proposals (one study showed 3-1 opposition), Senator Wyden’s proposal was originally to apply to “millionaires and billionaires”, or in the immortal words of Senator Russell B. Long, don’t tax you, don’t tax me, tax that fellow behind the tree. Of course, if you count home values into net worth as one does, there’s way more than a handful of taxpayers with a net worth over $1 million. When Senator Wyden says “millionaires and billionaires” he doesn’t really mean just any millionaire because that would mean a lot of homeowners–eight million homes in the US are valued over $1 million. He probably means “rich people” especially rich people who inherited wealth. Like Ron Wyden.

But there’s rich and then there’s rich. Washington being what it is, when they’ve spent and leveraged new taxes from “millionaires and billionaires” what starts out being a tax that only effects a relatively small percentage of the universe of taxpayers, somehow has a way of seeking lower levels–you know, trickle down. That’s already happened–what started out with Senator Wyden going after “millionaires and billionaires” or what in March 2024 the Treasury Department called a “Billionaires Tax” has now settled into people with $100 million net worth (assets minus liabilities). That’s about 14,000 taxpayers in the US. And stay with me here–even though the threshold is $100 million the tax is called the Billionaires Minimum Income Tax, or “BMIT.” That acronym makes you focus on the billionaires (boo!) and ignore that billionaires are only about half the people who will be subject to the tax. And when Washington comes up with an acronym that hides an important detail like who is taxed, you know they’re serious. The plan may be shovel ready, but it’s definitely trickle down–and it’s only August.

$100 million is not a billion. $100 million could include Bruce Springsteen, Bob Dylan, Stevie Nicks, Neil Young and probably Paul Simon, estate of David Bowie and Bon Jovi, maybe all or substantially all major songwriters who sold their catalogs in the last few years. If they weren’t in the category before they sold their catalogs, they probably were after the sale which was likely taxed at the lower capital gains rate and not at the higher ordinary income rates. If you were, say, Taylor Swift or Beyoncé who have yet to sell their catalogs, your net worth is over $100 million and unrealized gains in that song catalog might be a juicy target for the IRS and their unrealized capital gains tax.

The Valuation Problem

So who decides how much unrealized gain is taxable? That question lays bare the valuation problem with this proposal. Remember, unrealized capital gain refers to the increase in value of an investment or an asset that you hold but have not yet sold. Remember, these gains are “unrealized” because they exist only on paper. Gains (or losses) only become “realized” once the asset is sold. The amount of unrealized gain or loss is the difference between the initial purchase price and the current market price. And therein lies the rub.

If the asset has not been sold, then in order to be taxed in must be valued. Coming up with a value is pretty easy if the asset is a publicly traded stock. But–if that particular asset class does not have a liquid market, then someone has to “mark to market” being an estimate of the fair market value of the asset on the day the asset is valued, or “marked.” In other words, “they” guess. The taxpayer hopes they guess low, and the IRS hopes they guess high. The problem is, the IRS’s guess is the only one that counts.

If that seems unconstitutional, have a peek at a recent U.S. Supreme Court case, Moore v. United States. Writing for a 7-2 majority, Justice Kavanaugh said that a similar (but not identical in my view) set of facts allowed Congress to tax U.S. residents on “realized but undistributed” income from a closely held foreign corporation. Justice Kavanaugh for the majority held that tax “does not exceed Congress’s constitutional authority” that “applies when Congress treats the entity [receiving the money] as a pass-through.” Importantly, Justices Thomas and Gorsuch dissented asserting that because the taxpayers “never actually received any of their investment gains, those unrealized gains could not be taxed as ‘income.” It also should be noted that the majority took great pains to make clear that the Moore case presented a “precise and narrow question” which should be construed narrowly. Dissents have a way of becoming the opinion of the Court, so I wouldn’t make too much of the Moore case in the context of taxing unrealized capital gains for your house although many commenters think it’s a step toward finding that the “billionaire’s tax” is Constitutional. I think Moore can be distinguished.

The Invitation to Shenanigans

Compare mark to market to historical cost accounting, which maintains an asset’s value at the original purchase cost. This can get hinky in volatile markets. If you remember the end of The Big Short, Dr. Michael Burry was trying to get the smart people on Wall Street to mark his credit default swaps which would have required them to take an even bigger bath than the smug bankers actually took.

This was an invitation to shenanigans. Goldman came up with excuses for why they hadn’t marked the swaps (“Goldman had a systems failure…” an excuse Dr. Burry receives skeptically. That’s mark to market. Somebody like Goldman Sachs or the IRS who is conflicted invents a value today that benefits them without regard to what you paid or what would be paid. You know, like when the willing buyer and the willing seller are the same person.

Crucially, the liquidity and valuation problems with taxing unrealized gains are a practical ones–you’ll be taxing people on paper profits when they have not realized the cash to pay the tax. That means the tax payment has to come from somewhere else unless the holder is forced to sell the taxable asset in order to pay the tax. And is able to sell.

In the case of illiquid assets, like say song catalogs, that may not be so easy to do. One of the reasons that the U.S. has never taxed unrealized capital gains is that the practical problems can become political problems.

Will Song Catalogs Be Subject to the New Wealth Tax?

But, yes, I did say song catalogs. Hold that thought for a moment and let’s look at what assets will be included in this new tax category. And think about this thought experiment: Songwriter A manages to get to the point that they can sell their catalog for a price that puts their net worth over $100 million but does not sell futures. Those as yet unwritten songs will accumulate in a new catalog. The songwriter then continues to write valuable songs and creates a new publishing catalog and holds off selling that catalog for a while–under the proposal that new catalog would potentially be subject to the unrealized capital gains wealth tax. Here are the asset classes we know about:

1. Publicly Traded Securities

Publicly traded securities, such as stocks, bonds and mutual fund shares, are a big target. If there is a liquid market for these assets, valuation is relatively easy based on their market price. Remember, if you hold shares in a publicly traded company and the value of those shares increases before you sell the shares, that unrealized gain would be subject to the proposed tax, even if you don’t sell your shares. I haven’t seen a discussion about unrealized losses. Gee, I wonder why.

2. Private Equity and Venture Capital Investments

If you hold shares in a private company or a startup, i.e., not publicly traded, unrealized gain in those shares is also taxed. This will surely raise valuation issues.

3. Real Estate Holdings

Residential or commercial real estate gains are also taxed. For example, if a paying taxpayer owns a home that has appreciated in value, the unrealized gain could be subject to the proposed tax.

4. Collectibles and Art

Collectibles and art are also included in the proposed tax base including fine art, rare coins, vintage cars, and other valuable collectibles These assets can appreciate over time, and the proposed laws aim to capture the unrealized gains on such items. Again, there’s a valuation issue.

5. Cryptocurrencies

Cryptocurrencies like Bitcoin or Ethereum would need to report and pay taxes on the unrealized gains of these digital assets. Given the volatility of many cryptocurrencies, valuation is going to be a challenge, particularly if Bitcoin was valued at 10x in year 1 but fell to -10x in year 2.

6. Other Securities

Securities like derivatives and options, are also included. These instruments can have complex valuations, but the proposed laws require taxpayers to report unrealized gains on these assets.

Will Valuation Experts be Worth More than Songwriters?

There are many consequences of establishing a new tax regime like taxing unrealized gains. It may seem far off if the only people affected (for now) are $100 millionaires. But having crossed that red line, both more asset classes and more taxpayers could be drawn in. If the government dropped the limit to taxpayers with a net worth of $50 million, they now have 97,000 taxpayers to hit with an unrealized gains tax bill. At a $25 million net worth, there are over 250,000. Is $25 million still rich? Not in Silicon Valley, maybe, but anywhere else…. So how long do you think it will take for “them” to get down to that level or even lower with their billionaires tax on millionaires? Get thee behind me, Satan.

Obviously, the business to be in if this regime becomes law is the valuation business.