Songwriting Royalties

[Corduroy Frog]

Ran into an unusual topic with a retired scientist. Apparently, in his youth, he was an aspiring songwriter. He has been receiving royalties for over 40 years for a song he wrote, recorded by Patsy Cline. Not a huge hit by anyone's standards, but sometimes, somewhere, some radio station will play it, and he still receives some $300/year, even though the song has long ago moved into public domain.

Is this Schedule C or Schedule E?? Not that this amount is that big an issue.

Before you answer, he tells me in the early days of the song, IRS told him all songwriters had to report payments as royalties on Schedule E. At the time, unearned income had a incremental ceiling of 70%, and was taxed at the highest rate the IRS could muster.

I vaguely remember the year of a drastic change. Nixon was president. He had a Democratic congress who kept putting pressure to institute a so-called "minimum tax" for filthy rich taxpayers who used huge tax breaks to lower their tax. Nixon wasn't wild about the idea but consented to the minimum tax by also writing in a "maximum" tax of 50% on earned income. This kept wealthy corporate CEOs out of the 70% tax bracket, and in time, even the 70% tax bracket became history. And so, the alternative minimum tax was born, designed to tax the "very rich."

Sorry for the tangent on history -- I really only wanted to know whether song royalties are earned income or not...and after they've been around so long, does the interpretation change...

[JG EA]

It is my understanding that one book, one song, one creative work of any kind is capital gain. (Not in the business of...)

However, if any revisions are made or any further songs then it is Sch C.

[New York Enrolled Agent]

Is writing one song equivalent to writing one book?

You might look at Langford TC Memo 1988-300 citing two Rev Rulings dealing with writers which contains in part (caps added):

"It has been respondent's long-standing position that "If an individual writes only ONE book as a sideline and never revises it, he would not be considered to be 'regularly engaged' in an occupation or profession and his royalties therefrom would not be considered net earnings from self-employment." Rev.Rul. 55-385, 1955-1 C.B. 100; Rev.Rul. 68-498, 1968-2 C.B. 377. "

Taxpayer won the case - no SE tax.

[George Boutwell]

Assignment of Income

The sticky problem that comes up with book or music royalties is what happens when they are assigned to someone else. It is not uncommon to sell royalty rights -- that's how Michael Jackson ended up with half the royalties to most Beatles music. (The Beatles had sold them in order to convert them from ordinary income to capital gains.)

If royalties are earned income, how can taxpayers get away with selling them to someone else? I can't sell my accounts receivable. And since obviously they are not earned income for the buyer, how much revenue does Social Security (and the Medicare accont) lose by allowing assigned royalties to escape taxation?

I once worked on a case involving the ex-wife of the lead singer of a band whose name is a household word (at least for those of us who were around during the Nixon Administration). She was assigned some of his royalties in a property settlement. This was in the day before QDRO's for pension benefits. IRS told her she had to pay tax on the income; she suggested that it should be taxable to the guy who earned it, so IRS went to District Court and convinced a judge it wasn't.

[Chief]

Frog

Without any comments about this situation I would report this royalty on Sch E. It's not that much money and I would guess the taxpayer will never have it questioned.

[jainen]

the rest of the day

>>even though the song has long ago moved into public domain<<

I'm sure the agents for Patsy Cline's heirs made sure all copyrights were renewed in a timely manner. Recent law extends everything to 70 years after the author's death. Patsy Cline of course remains popular all over the world so international laws also apply.

Thanks for the reminder. I'll listen to Patsy Cline the rest of the day.

[Corduroy Frog]

Song

Song is "Momma Went Walking." Author lives in Huntsville AL and was an eminent scientist. He probably wouldn't mind me telling his name, but out of practice I keep all such items confidential.

[jainen]

an old hospital bill

>>I can't sell my accounts receivable.<<

I hope you're right. I've got this collection agency calling me about an old hospital bill....

[Kram BergGold]

Schedule E

I repeat Schedule E.

[JON]

I think we have been here before

If your job is to write music. The royalties are schedule C. If you buy a music library that someone else has written it goes on E. The NY enrolled agent points out when are you in the business of writting songs. What if you wrote a 100 songs, have a regular full time job and one song goes and you get royalties???? A tax is taxing.

[George Boutwell]

What if you wrote a 100 songs, have a regular full time job and one song goes and you get royalties?

How would IRS have applied the "One Book Rule" to Margaret Mitchell?

[Davc]

If royalties are earned income, how can taxpayers get away with selling them to someone else? I can't sell my accounts receivable.

Actually you can sell A/R at a discount.. The proceeds would be SE income to you assuming cash basis and the collections are not SE to the factor who purchased them except for anything above what they paid.

[George Boutwell]

Actually you can sell A/R at a discount..

Not my A/R's. I sell them at a premium, because my clients include such generous tips.

Yes, I know, I should have elaborated by stating "I can't escape taxation by passing the liability along to someone else by selling my accounts receivable."

[Bees Knees]

TTB, page 5-18 has the following to say on the subject:

Royalties. If the taxpayer is a self-employed writer, inventor, or
artist, royalty income from copyrights owned in connection with
the self-employment activity are reported on Schedule C, subject
to SE tax. If the taxpayer is not performing services as a self-employed
individual, royalties from copyrights are reported on
Schedule E, and are not subject to SE tax.

Author’s Comment: The issue seems to center on whether income is
for the performance of personal services or for the ownership of an
intangible asset. Royalties paid for oil, gas or mineral property (other
than operating interests) are not subject to SE tax because the taxpayer
does not perform any services in connection with the right to receive
a royalty. In contrast, IRS Market Segment Specialization Paper #14
for entertainment and foreign athletes says all endorsement income
of professional athletes is personal service income since the athlete
is required by the endorsement contract to perform in connection with
receiving the income. It is reasonable to conclude, then, that the act
of performing a service that produces a musical composition, a literary
work, or work of art is a performance of services in connection
with a self-employment activity. Any royalties received for owning the
copyright to such work is SE income. In contrast, a person who purchases
the right to a copyright of a musical composition or literary
work as investment property would not treat related royalty income
as SE income.

Example: Paul was lead singer for the Zagnuts in
1979 and wrote their one hit wonder entitled
Wholly Bholly. He has been receiving royalties
ever since, even though he hasn’t performed as a
professional musician for 20 years. Paul must report his royalty income
as SE income because he is receiving the income as a result of past
personal services performed.

[Corduroy Frog]

Ah yes!! There's the rub

from Bees Knees post, you get the idea. IRS wants this taxed as personal service income because this guy was a struggling songwriter back in 1962. Collect self-employment tax, right?

However, according to him, he once turned this in and IRS told him it was "Royalty" income during the early 70s. By then he had arrived big time as a scientist, and IRS was trying to squeeze 70% money out of everyone they could. Talk about inconsistent!