CCA 200952048: Payments to artists for music downloads are royalties

Plain-English summary

Chief Counsel Advice addresses whether payments made to artists through a music website are royalty payments for information reporting and withholding purposes. Under the described arrangement, an artist paid a fee to submit an album, a third party paid to download the music at a price set by the artist, and the website kept a percentage before sending the balance to the artist. The advice concludes that the artists' proceeds constitute royalties. It also clarifies that the cited regulation requires withholding and deposits to be reported on Form 945, and discusses potential penalties under the cited Code sections.

Ruling snapshot

• Question: Are payments to artists from paid music downloads royalties requiring an information return or backup withholding?
• Outcome: Advice given
• Key authorities: IRC §§ 6050N, 3403, 6656, and 6302; Treas. Reg. § 31.6011(a)-4(b)(5)

Full text (IRS public release)

ID: CCA_2009120315011152 Number: 200952048
Release Date: 12/24/2009
Office: --------------
UILC: 6050N.00-00

From: -----------------------
Sent: Thursday, December 03, 2009 3:01:18 PM
To: ------------------
Cc: ---------------------
Subject: RE: Coordination on section 6050N issue

This responds to your question about the applicability of section 6050N and whether the payments to artists in the situation described below are royalty payments for which an information return / backup withholding would be required. Based upon the facts presented, we concur that the proceeds received by the artists constitute royalties.

Artist submits music to website.
Website charges artist one time fee for each album submitted by artist. 3rd party downloads music for a fee (set by artist). Website retains a percentage of this fee and forwards the rest to the artist.

Although not part of your inquiry, I wanted to highlight that the regulation cited, 31.6011(a)-4(b)(5) does not impose backup withholding, but requires the withholding and deposits to be reported on Form 945. Also, the "penalty" for failure to backup withhold is under section 3403, where the payor is ultimately liable for the amount that it should have withheld. The failure to deposit penalty under section 6656 generally is only asserted with respect to amounts that were actually withheld but not deposited. See generally section 6302 and the regulations thereunder.

Please contact me with any questions or comments.