Business

Sale Away: Biden's Proposed Tax Hike Could Spark More Publishing Deals This Year

Joe Biden presidential nominee
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Democratic presidential nominee Joe Biden gestures after speaking during election night at the Chase Center in Wilmington, Delaware, early on November 4, 2020.

Attorneys in the publishing business say they’re taking more calls from songwriters interested in selling before the president-elect takes office.

Joe Biden's win in the U.S. presidential election has some songwriters rushing to sell their publishing rights before the end of the year.

The Internal Revenue Service generally treats income from the sale or exchange of "self-created musical works" as a capital gain, currently subject to a top federal tax rate of 20%, rather than personal income. During his campaign, Biden proposed doubling to 40% the top federal tax rate on capital gains, or taxing them as personal income, which is currently subject to a top rate of 37% — although Biden has talked about raising that, too.

For songwriters selling major catalogs, such a change would raise tax bills considerably. "There's always a want-to-do by the end of the year," says attorney Erin Jacobson, who has done deals involving the catalogs of major creators, "but there's uncertainty now because there could be a change."

A tax hike isn't a sure thing: Democrats are likely to control Congress only if they win the runoff elections for the two Senate seats in Georgia. If they do, however, Biden could very well be able to raise both personal and capital gains taxes.

This wouldn't be the first time that tax policy shaped the publishing business by changing the incentives to sell rights. From 1950 to 2006, the IRS treated income from catalog sales, as well as publishing royalties, as personal income. (The debate over how to tax creative works goes back to 1948, when the IRS ruled that, as an amateur author, Dwight Eisenhower could have his earnings from a memoir taxed as a capital gain. Two years later, Congress passed a law that made that impossible.) In 2006, the Songwriters Capital Gains Tax Equity Act categorized "self-created musical works" — rights to compositions owned by their writers — as capital assets. That meant songwriters still paid federal income tax on publishing royalties but would pay far less in capital gains taxes if they sold the rights.

At the time, the top capital gains tax rate was 15%, while the top personal income tax rate was 35%, and the change opened the floodgates for rights sales. Music executives founded startups like Primary Wave, which in 2007 bought rights from Maurice White, Lamont Dozier and the estate of Kurt Cobain — and the resulting competition for deals drove up valuations. More recently, the boom in streaming and the search for investment opportunities driven by low interest rates attracted big money in the form of institutional investors like pension funds. Flush with cash, companies like Hipgnosis Songs, Primary Wave, Concord Music Group, Round Hill Music and Anthem Entertainment acquire dozens of major catalogs each year.

Transactional attorneys in the publishing business say they're already taking more phone calls from songwriters interested in selling before January. But that doesn't mean selling now is necessarily the right move, cautions Mark Kaplan, a partner at Citrin Cooperman who specializes in working with creators; a catalog could appreciate enough to make up for an increase in taxes. Plus, if current trends continue, there will be no shortage of buyers in 2021. "We have every indication," says Lisa Alter, a founding partner at the law firm Alter Kendrick & Baron who has represented a number of creators as well as Primary Wave, "that the market for music assets will remain strong through 2021 and beyond."

This article originally appeared in the Nov. 14, 2020, issue of Billboard.