2011-2549. Time and Manner for Electing Capital Asset Treatment for Certain Self-Created Musical Works

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulation and removal of temporary regulation.

SUMMARY:

This document contains a final regulation that provides the time and manner rules for electing to treat the sale or exchange of a musical composition or a copyright in a musical work created by the taxpayer (or received by the taxpayer from the composition or work's creator in a transferred basis transaction) as the sale or exchange of a capital asset. The regulation reflects changes to the law made by the Tax Increase Prevention and Reconciliation Act of 2005 and the Tax Relief and Health Care Act of 2006. The regulation affects taxpayers who elect to treat gain or loss from such a sale or exchange as capital gain or loss.

DATES:

Effective Date: This regulation is effective on February 7, 2011.

Applicability Date: For date of applicability, see § 1.1221-3(d).

FOR FURTHER INFORMATION CONTACT:

Jamie Kim, [phone] (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains an amendment to the Income Tax Regulations (26 CFR part 1). On February 8, 2008, a temporary regulation (TD 9379) was published in the Federal Register (73 FR 7464) that provided the time and manner rules for electing capital asset treatment for certain self-created musical works. A notice of proposed rulemaking (REG-153589-06) cross-referencing the temporary regulation also was published in the Federal Register (73 FR 7503) on February 8, 2008. No comments in response to the notice of proposed rulemaking or requests to hold a public hearing were received, and no hearing was held. This Treasury decision adopts the proposed regulation with minor changes and removes the temporary regulation.

Section 1221(a) of the Internal Revenue Code (Code) generally provides that capital assets include all property held by a taxpayer with certain specified exclusions. Section 1221(a)(1) excludes from the definition of a capital asset inventory property or property held by a taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business. Section 1221(a)(3) excludes from the definition of a capital asset certain property—a copyright; a literary, musical, or artistic composition; a letter or memorandum; or similar property—held by a taxpayer whose personal efforts created the property (or held by a taxpayer whose basis in the property is determined by reference to the basis of such property in the hands of the taxpayer whose personal efforts created the property).

Section 1221(b)(3) of the Code, added by section 204 of the Tax Increase Prevention and Reconciliation Act of 2005, Public Law 109-222 (120 Stat. 345 (2005)), and amended by section 412 of the Tax Relief and Health Care Act of 2006, Public Law 109-432 (120 Stat. 2922 (2006)), provides that, at the election of a taxpayer, the section 1221(a)(1) and (a)(3) exclusions from capital asset status will not apply to a musical composition or a copyright in a musical work sold or exchanged by a taxpayer described in section 1221(a)(3). Thus, if a taxpayer who owns a musical composition or copyright in a musical work created by the taxpayer (or transferred to the taxpayer by the composition or work's creator in a transferred basis transaction) elects the application of this provision, gain or loss from the sale or exchange of the musical composition or copyright is treated as capital gain or loss.

Explanation of Provisions

This final regulation provides rules regarding the time and manner for electing under section 1221(b)(3) to treat gain or loss from the sale or exchange of certain musical compositions or copyrights in musical works as gain or loss from the sale or exchange of a capital asset.

Effective/Applicability Date

This regulation applies to elections under section 1221(b)(3) in taxable years beginning after May 17, 2006.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. Chapter 5) does not apply to this regulation, and because the regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. Chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of this regulation is Jamie Kim of the Office of Associate Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and the Treasury Department participated in its development.

List of Subjects in 26 CFR Part 1

• Income taxes
• Reporting and recordkeeping requirements

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows.

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.1221-3 is added to read as follows:

§ 1.1221-3

Time and manner for electing capital asset treatment for certain self-created musical works.

(a) Description. Section 1221(b)(3) allows an electing taxpayer to treat the sale or exchange of a musical composition or a copyright in a musical work created by the taxpayer's personal efforts (or having a basis determined by reference to the basis of such property in the hands of a taxpayer whose personal efforts created such property) as the sale or exchange of a capital asset. As a consequence, gain or loss from the sale or exchange is treated as capital gain or loss.

(b) Time and manner for making the election. An election described in this section is made separately for each musical composition (or copyright in a musical work) sold or exchanged during the taxable year. An election must be made on or before the due date (including extensions) of the income tax return for the taxable year of the sale or exchange. The election is made on Schedule D, “Capital Gains and Losses,” of the appropriate income tax form (for example, Form 1040, “U.S. Individual Income Tax Return;” Form 1065, “U.S. Return of Partnership Income;” Form 1120, “U.S. Corporation Income Tax Return”) by treating the sale or exchange as the sale or exchange of a capital asset, in accordance with the form and its instructions.

(c) Revocability of election. The election described in this section is revocable with the consent of the Commissioner. To seek consent to revoke the election, a taxpayer must submit a request for a letter ruling under the applicable administrative procedures. Alternatively, an automatic extension of 6 months from the due date of the taxpayer's income tax return (excluding extensions) is granted to revoke the election, provided the taxpayer timely filed the taxpayer's income tax return and, within this 6-month extension period, the taxpayer files an amended income tax return that treats the sale or exchange as the sale or exchange of property that is not a capital asset.

(d) Effective/applicability date. This section applies to elections under section 1221(b)(3) in taxable years beginning after May 17, 2006.

§ 1.1221-3T

[Removed]

Par. 3. Section 1.1221-3T is removed.

Steven T. Miller,

Deputy Commissioner for Services and Enforcement.

Approved: January 28, 2011.

Michael Mundaca,

Assistant Secretary of the Treasury (Tax Policy).