I am not a lawyer, but here's a bit of clarification.

Making a recording from a song is a creative act, and so the recording falls under copyright. To play it back, broadcast it, or create other material based *on the recording* would require payment of a royalty or license fee. Whether or not the *song as recorded* is copyrightable is another question, depending on the nature and extent of the changes. A judge would refer to the 1914 case Cooper v. James [1].

In Cooper v. James, two men had independently republished the public-domain Sacred Harp songbook with their own newly-devised alto parts. One brought suit, arguing that to add a fourth part was his own creative idea and protected under copyright. The court found against him: "In patents we say that any improvement which a good mechanic could make is not the subject of a patent, so in music it may be said that anything which a fairly good musician can make, the same old tune being preserved, could not be the subject of a copyright."

I gather that nowadays arranging gets more respect under the law. If your arrangement or adaptation substantially changes the experience of hearing the song, it may be creative enough to be copyrightable. But it's got to be meaty work -- as much as I think Eva Cassidy improved Somewhere Over the Rainbow when she recorded it, I don't think she wrote a new *song* in the process. And I don't think tweaking a couple of words or chords would do it either.

Oh, and for what it's worth, US law does not allow chord progressions to be copyrighted by themselves -- only with a melody attached. Jazz musicians are safe.

[1] http://ccnmtl.columbia.edu/projects/law/library/cases/case_cooperjames.html

P.S.: Back on topic, anyone heard Doc and Richard Watson's recording of "Gypsy Davey" on Third Generation Blues? Any guess where they got that melody from? I note that they, too, have a moralizing verse at the end (two, actually):

When the silks and the rings and the gold were gone,
Old Davey would not tarry.
He said, "You're not a gypsy girl,
and you I cannot marry;
You I cannot marry."

As a beggar now, she's dressed in rags;
In her heart she's still a lady.
At night she'll cry herself to sleep,
Thinking about her baby,
True love and her baby.