As a tax lawyer, my professional life has the elements that my grandfather believed were essential to a really good job: indoor work, no heavy lifting.
In fact, there are only three things that I do as a tax lawyer. I help taxpayers (1) avoid income, (2) defer income, and (3) convert ordinary income into long-term capital gains. That’s really all there is to it, other than reading and understanding the Internal Revenue Code. All in all, as I said, a pretty cushy existence.
However, late at night, after everyone else has gone to bed, I sometimes wish I had time for one other important thing: I wish I had time to write country-western songs.
Unfortunately, country songwriting is a tough racket, and so I have stuck until now with the practice of law, with the occasional tax or sports article on the side. The problem was that, until recently, all income from writing activities was taxed at ordinary federal income tax rates. There was no percentage in that kind of work, I figured.
You can imagine my amazement, therefore, when country songwriters managed to convince Congress in 2005 and 2006 that their creative endeavors deserved a special tax dispensation and that the sale of a copyright in a song is no longer ordinary income, but rather can be taxed at favorable capital gains tax rates.
This is a story worth telling. In fact, I may even write a song about it.
The Eisenhower Rule
It all starts back yonder in 1950, when the U.S. Congress decided that writing is hard work and, in particular, decided that when writers, artists, composers, and similar folk create copyright works, the income from selling those works is similar to the wages earned by other working stiffs and should be taxed as ordinary income.
What Congress did was enact provisions, now contained in Code section 1221 (a)(3), stating that a “capital asset” does not include the following:
(3) a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by:
(A) a taxpayer whose personal efforts created such property …
This provision is sometimes called the “Eisenhower Rule” because it was enacted in response to a famous controversy involving General Dwight Eisenhower.
Following World War II, Eisenhower wrote a book called Crusade in Europe, recounting his experiences as the Commander-in-Chief of the Allied forces that defeated Hitler and Nazi Germany. Eisenhower sold the book rights and, because he characterized himself as an “amateur author,” claimed capital gain treatment on the sale. The case law at the time distinguished between an “amateur author” and a “professional author,” treating books written by professional authors as “inventory” (i.e., generating ordinary income) while treating books written by amateur authors as self-created capital assets (i.e., generating capital gain).
The IRS eventually ruled that Eisenhower was indeed an “amateur author” (it was not intended as an insult regarding his writing style) and therefore could enjoy capital-gain treatment. Congress did not particularly cotton to this “windfall” for Eisenhower, and almost immediately thereafter enacted the Eisenhower Rule, eliminating all distinctions between amateur and professional authors, and classifying income from the sale of copyrights as ordinary. The Eisenhower Rule was the law of the land for some 55 years.
Joe Darby, a tax law expert, is also the author of Practical Guide to Mergers, Acquisitions and Business Sales, 2nd Edition, published by The National Underwriter Company, a division of ALM Media. ThinkAdvisor readers can get this resource at a 10% discount. Go there now.
Then, in 2005 and 2006, in a turn of events as startling and unlikely as a happy ending to a country song, Congress added an election pursuant to which song writers can elect to treat gain (or loss) from the sale of a self-created musical work or copyright as a sale or exchange of a capital asset. This rule provides a fascinating glimpse at the modern U.S. income tax regime-so let me pick up my guitar and tell y’all how it came about.