Surprisingly, the legal status of "ripping" (making a MP3 format copy of a CD you own), and burning (making a CD-R copy of a CD you own), is not clear-cut. However, many lawyers believe these activities are legal if done for personal, non-commercial uses under the copyright doctrine of "fair use".
There's some argument about whether downloading MP3 versions of songs that you already own is fair use, and therefore not infringement. Some lawyers think this is implicit in the Sony Betamax and Diamond Rio cases. However, the only cases to have considered MP3s, the UMG v. MP3.com case (92 F. Supp. 2d 349 at 351-2 (S.D.N.Y.), and the Napster case (239 F. 3d 1004, (9th Circ, 2000)) did not consider this issue directly, so it's an open question.
As you acknowledge, "it is likely that Neale himself, while alive, did not commit copyright infringement at Step 2."
The question is whether the transfer to Neale's heirs of whatever rights he has in the MP3s is itself infringement or a violation of a license agreement.
It's certainly not infringement, because as huzzahhuzzah points out, you can freely transfer copyrighted works so long as you don't keep a copy for yourself.
Who says fair use protection is non-transferable? If I write a book that is a parody of a copyrighted work, my book is a fair use, and I can sell it, give it away, or will it to my heirs.
Why should MP3s be any different if I give them to someone with the original CDs? Same goes for backup copies of music, videos, etc. -- these are fair uses, but why shouldn't I be able to pass them along to someone else with the originals? How does this hurt the copyright holder in any way? Where is the copying?
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