Tax Planning – Positively Wall Street

Tax Planning – Positively Wall Street

The Time: July 25, 1965. The Place: The Newport Folk Festival. Master of Ceremonies Peter Yarrow steps out to introduce the singer-songwriter sensation Bob Dylan. Festival organizers are perplexed as they watch his crew setting up heavy equipment. Then Dylan takes the stage to launch into “Maggie’s Farm” — with (gasp!) a Fender Stratocaster. Dylan had “gone electric,” and music would never be the same. As one wag put it, “he electrified one half of his audience and electrocuted the other.”

Fifty-five years later, Dylan has sold over 100 million records, despite a singing voice that sounds like the love child of a sinus infection and an electric shaver. He’s Number Two on Rolling Stone’s list of rock’s 100 greatest artists, trailing only the Beatles. The list of wannabes who have been dubbed “the new Dylan” — a club that includes Bruce Springsteen, John Prine, and Gordon Lightfoot — could fill every coffeehouse in Greenwich Village.

Last week, Universal Music Publishing announced they had bought the rights to the 79-year-old Dylan’s entire songwriting catalog for a price estimated as high as $400 million. That’s an awfully nice payday for the voice of a baby boomer generation that used to disdain $400 million paydays (at least, before they got older and discovered 401(k)s and Fox News). But it’s also a shrewd tax move — one that could save Dylan and his family millions over time.

Dylan still makes millions in royalties from his music. They’re taxed as ordinary income at 37%, plus whatever state tax he might pay. Dylan currently spends much of his time in a 6,000-square-foot oceanview compound in Malibu, although it’s not certain he pays taxes as a California resident. Those rates may go up as soon as next year if Senate wins in Georgia give incoming President Joe Biden the votes to raise rates.

The sale will eliminate those future royalties and replace them with a lump-sum capital gain. Ordinarily, that’s a bad thing, paying tax now when you could wait until later. But that gain is taxed at a maximum of just 20%. So do the math: while paying 37% on $400 million of royalties would cost Dylan $148 million, paying 20% on the same amount of capital gain costs him “just” $80 million. Just like that, $68 million in tax is blowin’ in the wind.

The sale will also make it easier for Dylan’s heirs to settle his future estate. If the plan includes passing the catalog to his six children, he’s taxed at 40% on anything above a “unified credit exemption equivalent,” currently $11,580,000. A hard-to-value asset of that size almost guarantees getting tangled up in an audit to establish the proper value. (Michael Jackson’s executors pegged his image and likeness at just $2,105 — after ten years of fighting, the IRS sent them a bill for an extra $702 million.)

Dylan isn’t the only artist taking this step. Last month, Stevie Nicks announced she had sold 80% of her catalog, worth an estimated $100 million, to publisher Music Wave. She and Dylan join Blondie, Rick James, Barry Manilow, and Chrissie Hynde in selling rights, which generally trade for 10-18 times annual revenue.

Of course, there are plenty of tax strategies Dylan may have used to defer or eliminate tax on the sale. That’s where we come in. If you’re looking to sell a business, real estate, or even your own song catalog, you don’t have to feel like you’re stuck inside of Mobile with those Taxville blues again. We’ve got the tax strategies and proactive tax planning to giv