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.
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.
Take This Tax Rate and Shove It
It all begins, like every good country-western song should, with Code section 1221(a), which provides the definition of a "capital asset." This provision basically says that all property in the world is a capital asset, unless it falls into one of eight specific categories. Only three of these categories really matter, but these three categories are quite large, in fact, enormous.
The first category, Code section 1221 (a)(l), covers all items in the nature of inventory, while the second, Code section 1221 (a)(2), covers all assets used in a trade or business and subject to allowance for depreciation. How much property does that cover? Put it this way: when you walk into a Wal-Mart, everything in eyesight is in one of these two categories-it is either inventory or equipment used in the business to sell the inventory.
Code section 1221(a)(3), the Eisenhower Rule, is the third great exclusion from capital asset treatment. However a new provision, Code section 1221 (b)(3), provides that, at the election of a taxpayer, the section 1221(a)(1) and 1221(a)(3) exclusions from capital asset status do not apply to copyrights in musical works sold or exchanged by the taxpayer whose personal efforts created the property. Thus, a songwriter who creates a musical composition can now sell the song and elect capital gain treatment.
Don't Take Your Love to Town (Unless it's Washington)
As a tax attorney, I will confess to a twinge of professional jealousy. After all, one of the three things I do for a living is convert ordinary income to long-term capital gain, and my ability to perform this tax alchemy is highly regarded and well requited. But turning the "conversion" process into a mere taxpayer election takes all the voodoo out of it: Anyone can do that. It ain't hardly fun no more.
This special tax dodge for songwriters was introduced by Representative Ron Lewis of Kentucky, who apparently is a country-music fan and guitarist. However, the real driving force behind the law was the Nashville Songwriters' Association International (NSAI)-and they pulled it off in classic country style. NSAI shunned the usual "Gucci Gulch" lobbying techniques involving highly-paid lobbyists and expensive dinners. Instead, NSAI made a staggering number of visits to Washington (over 400 by one estimate), dragging songwriters along to plead their case.
(One can just imagine aspiring country-western artists pulling out their guitars at the climactic moment and singing twangy songs about their tragic and unrequited yearning for a long-term capital-gains tax rate to a stricken audience of politicians.) NSAI apparently pestered literally "every member of the tax-writing committees in the House and Senate," according to one source.
Knowing which side their country bread was buttered on, NSAI focused on legislators from southern states, plucking the heart strings of country-music lovers while pleading its case for tax relief. Although NSAI was lobbying solely for its country-singing constituents, them good ol' boys were savvy enough not to limit the tax break merely to country music. Therefore, the special rule applies to all songwriting, whether rock or country, symphony or rap.
Congress, which clearly loves country music but not newspapers, decided to extend this special benefit only to songwriters and not to the folks who write articles or books, sculpt sculptures, paint paintings, or choreograph ballet. Therefore, the ink-stained wretches of the newspaper world must still fork over their hard-earned cash at the usual tax rates.
All My Ex's Don't Pay Taxes, or Stand by Your (Tax) Man
The only conceivable defense for this strange and lopsided tax benefit is that the stakes appear to be quite small. Once source estimates that this tax break will cost the U.S. government just $4 million per year in lost tax revenues/ while the Joint Committee on Taxation puts the revenue loss at $29 million over the ten years from 2007 to 2016.
However, even if these paltry revenue costs arc correct-and they seem suspiciously low to this country boy-the real question is ·whether providing this kind of special tax break is worth the greater "cost" that comes from junking up yet again the Internal Revenue Code. For better or worse, the Code has become the central political compact of the United States of America. More important than the Constitution? You bet. More significant than the Bill of Rights? Be serious.
We use the Code to collect government revenues, but we also use it to achieve a plethora of other social and political goals. The Code, through the Earned Income Tax Credit, has become a central mechanism for distributing welfare, and through the Low Income Housing Tax Credit has become the principal engine for building housing for the poor. We also use the Code to support alternative energy projects, to rehabilitate historic buildings, and to encourage scientific research. And now we use it to subsidize the writing of songs. The Code, in short, has become a huge political taffy pull, with everyone trying to twist the rules for their own special benefit. To quote that famous country-western aficionado, Otto von Bismarck, "Laws are like sausage. It is better not to see them being made."
In the meantime, I could use a lower tax rate myself, and so my plan is to use the NSAI blueprint and lobby for my own personal tax break. I intend to write a country-western ballad about why I need, why I deserve, O Lord, this special tax relief, and then march down to Washington with my guitar so that I can play my song over and over again to all 535 members of Congress. My pitch to Congress will be elegant in its directness and simplicity: "You better give me my tax break right now or I'll play this song again."