Cameo Clips

ARTIST ROYALTIES/DIGITAL DOWNLOADS

The U.S. District Court for the Central District of California decided that the “net receipts” Aftermath Records owes rapper Eminem's early producers ' for the licensing of the artist's sound recordings for permanent digital downloads and ringtone masters ' are to be calculated after the label deducts its mechanical royalty costs for use of the underlying songs and its recording distribution fees. But the district court further found Aftermath's owners couldn't deduct “new medium” and “container” charges when it comes to digital music sales. F.B.T. Productions LLC v. Aftermath Records, 07-3314.

The case had been remanded to the district court by the U.S. Court of Appeals for the Ninth Circuit, which found that Aftermath and its joint venture owners, Interscope Records, UMG Recordings and ARY Inc., owed the producers 50% of label income earned from the Eminem recordings under a “Masters Licensed” recording agreement clause, rather than a 12% to 20% royalty rate under a “Records Sold” provision. District Judge Philip S. Gutierrez then noted in part: “Plaintiffs argue that testimony and exhibits introduced at trial show that Aftermath does not deduct mechanical royalties or distribution fees from the licensing income received from conditional downloads and streams. ' Plaintiffs' conclusion does not follow from the evidence. The reason Aftermath does not deduct mechanical royalties or distribution fees from income received from licensing conditional downloads and streams is because Aftermath does not pay those costs for licensing conditional downloads and streams.”

The district judge further held that F.B.T.'s royalties from Eminem side recordings (i.e., projects with third parties and with other artists) are to be calculated under specific artist/Aftermath contract provisions for those situations, instead of as “Masters Licensed.”

Meanwhile, in two putative class actions by recording artists seeking half of UMG's income from digital recordings sales, the U.S. District Court for the Northern District of California allowed the artists to proceed on claims of deceptive practices under California Business & Professions Code '17200. The artists aren't “consumers” or the label's “business competitors,” but District Judge Susan Illston noted the complaints against music giant UMG “do allege a connection to the protection of the public.” James v. UMG Recordings, 11-1613. Judge Illston also denied UMG's motion to dismiss or transfer the suits for improper venue, and denied a motion to intervene as plaintiff by the music group The Tubes, which also has a UMG contract. Judge Illston found on the latter point that the band “assert[s] claims 'parallel' to those already pending before the Court, and thus The Tubes' interests are already represented in these cases.”

In a case of first impression, the U.S. Court of Appeals for the Fifth Circuit decided that a tax-deduction disallowance under 26 U.S.C. '267(a)(2) amounted to a change per 26 U.S.C. '481 in the method of accounting, thus resulting in denial of taxpayers' accounts-payable deductions. Bosamia v. Commissioner of Internal Revenue, 10-60921. The taxpayers, Ramesh and Pragati Bosamia, owned India Music and HRI, two music import companies formed as Subchapter S corporations. India Music bought product from HRI. However, '267(a)(2) prohibits related entities from deducting monies owed from one to the other prior to it being reported as income by the other party. India Music accounted on an accrual basis; HRI on a cash basis. The Commissioner of Internal Revenue disallowed deductions India Music sought for payments it had made to HRI from 1998 to 2004. The Tax Court upheld the disallowance. Affirming, the Fifth Circuit noted that “by 'matching' the time at which India Music could deduct its accounts payable owed to HRI with the time at which HRI could include those payments as income, the Commissioner's '267(a)(2) disallowance effectively changed India Music's accounting method for its account payable deduction in the 2004 taxable year from an accrual basis to a cash basis.”

ARTIST ROYALTIES/DIGITAL DOWNLOADS

The U.S. District Court for the Central District of California decided that the “net receipts” Aftermath Records owes rapper Eminem's early producers ' for the licensing of the artist's sound recordings for permanent digital downloads and ringtone masters ' are to be calculated after the label deducts its mechanical royalty costs for use of the underlying songs and its recording distribution fees. But the district court further found Aftermath's owners couldn't deduct “new medium” and “container” charges when it comes to digital music sales. F.B.T. Productions LLC v. Aftermath Records, 07-3314.

The case had been remanded to the district court by the U.S. Court of Appeals for the Ninth Circuit, which found that Aftermath and its joint venture owners, Interscope Records, UMG Recordings and ARY Inc., owed the producers 50% of label income earned from the Eminem recordings under a “Masters Licensed” recording agreement clause, rather than a 12% to 20% royalty rate under a “Records Sold” provision. District Judge Philip S. Gutierrez then noted in part: “Plaintiffs argue that testimony and exhibits introduced at trial show that Aftermath does not deduct mechanical royalties or distribution fees from the licensing income received from conditional downloads and streams. ' Plaintiffs' conclusion does not follow from the evidence. The reason Aftermath does not deduct mechanical royalties or distribution fees from income received from licensing conditional downloads and streams is because Aftermath does not pay those costs for licensing conditional downloads and streams.”

The district judge further held that F.B.T.'s royalties from Eminem side recordings (i.e., projects with third parties and with other artists) are to be calculated under specific artist/Aftermath contract provisions for those situations, instead of as “Masters Licensed.”

Meanwhile, in two putative class actions by recording artists seeking half of UMG's income from digital recordings sales, the U.S. District Court for the Northern District of California allowed the artists to proceed on claims of deceptive practices under California Business & Professions Code '17200. The artists aren't “consumers” or the label's “business competitors,” but District Judge Susan Illston noted the complaints against music giant UMG “do allege a connection to the protection of the public.” James v. UMG Recordings, 11-1613. Judge Illston also denied UMG's motion to dismiss or transfer the suits for improper venue, and denied a motion to intervene as plaintiff by the music group The Tubes, which also has a UMG contract. Judge Illston found on the latter point that the band “assert[s] claims 'parallel' to those already pending before the Court, and thus The Tubes' interests are already represented in these cases.”

In a case of first impression, the U.S. Court of Appeals for the Fifth Circuit decided that a tax-deduction disallowance under 26 U.S.C. '267(a)(2) amounted to a change per 26 U.S.C. '481 in the method of accounting, thus resulting in denial of taxpayers' accounts-payable deductions. Bosamia v. Commissioner of Internal Revenue, 10-60921. The taxpayers, Ramesh and Pragati Bosamia, owned India Music and HRI, two music import companies formed as Subchapter S corporations. India Music bought product from HRI. However, '267(a)(2) prohibits related entities from deducting monies owed from one to the other prior to it being reported as income by the other party. India Music accounted on an accrual basis; HRI on a cash basis. The Commissioner of Internal Revenue disallowed deductions India Music sought for payments it had made to HRI from 1998 to 2004. The Tax Court upheld the disallowance. Affirming, the Fifth Circuit noted that “by 'matching' the time at which India Music could deduct its accounts payable owed to HRI with the time at which HRI could include those payments as income, the Commissioner's '267(a)(2) disallowance effectively changed India Music's accounting method for its account payable deduction in the 2004 taxable year from an accrual basis to a cash basis.”