Theoretically it isn't legal at all and if the publisher/writer asked them to to take it down they would have to
immediately.

I think the major concern in monthly challenges, would maybe be the forum's potential liability.

http://www.wired.co.uk/article/cover-song-licensing-on-youtube

Adrian wrote a fine post a while back on the topic : http://www.guitarforum.co.za/general-music/infringing-copyright-or-not-that-is-the-question/msg265294/#msg265294

It doesn't fully answer the question - but it's as close as I can find (Adrian is practicing IP/Music law).

The youtube question is a grey area to me - there's a lot of copyrighted material uploaded by people who are clearly not the owners/originators of the material & the uploader is potentially profiting (via youtube advertising) from the material. Allegedly youtube is paying some of the royalties to the originators of the material - but it's a fraction of what the artist may get from traditional royalties sources (including itunes/bandcamp).

In my layperson approach, I have done one track (remix) where I was concerned that I'd get flagged. The answer (about 3yrs ago) was to purchase licences for internet play - worked about to about 20USD/1000 plays. I never did, track has been up on soundcloud for 3 yrs (around 1000 plays) and I've never had an issue. If it went viral (millions of plays) I'd probably have to talk to Adrian, but until then I reckon I'm safe.

For the challenges - I like to err on the side of caution - exactly like Studmissile mentioned, for purposes of liability. Many times I've wanted to do a cover challenge, but the headache of getting material licenced always put me off.

Farrrr easier to do a challenge like we are this month - take the nuts and bolts (chord progression) and use that as inspiration.

There's also a fairly big industry for advertising, by 'copying' songs without infringing copyright - usually for advertising where the original artist wants too much $ for licencing or hasn't given permission. One that always sticks out is the Pringles ad from a few years back, the soundtrack was 100% Blur's Song2 - but different enough for them to get away with the composition (The drums were identical!).

Thanks guys.
I am now more confused than ever.

I get the feeling that there is no easy answer. Eventually it comes down to do what you feel you can and err on the side of caution.

There are usually 3 reasons why copyrighted stuff isn't taken down or draws attention:

1. The publisher is unaware of it
2. The track is for teaching purposes, and so no money is being gained by it.
3. It costs money to sue, so "joe" jamming in his bedroom, would only be a significant if it suddenly went viral.

All these copyright lawsuits, only hit the headlines when the song concerned is a big hit.