[Federal Register Volume 76, Number 25 (Monday, February 7, 2011)]
[Rules and Regulations]
[Pages 6553-6554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2549]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9514]
RIN 1545-BG34


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 Sec.  1.1221-
3(d).

FOR FURTHER INFORMATION CONTACT: Jamie Kim, (202) 622-4950 (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

[[Page 6554]]

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

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.1221-3 is added to read as follows:


Sec.  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.

Sec.  1.1221-3T  [Removed]

0
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).
[FR Doc. 2011-2549 Filed 2-4-11; 8:45 am]
BILLING CODE 4830-01-P