well, that would be illegal.
Actually.... As long as you copy the CD with a standalone CD recorder (and not a computer) and you use the special Audio CD discs available at the local Walmart to do it, it would be perfectly legal to do so, so long as the person making the copies isn't getting compensated in any way for doing so.
This is because of the AHRA (Audio Home Recording Act) which explicitly states (in
17 USC 1008):
No action may be brought under this title alleging infringement of copyright based on the manufacture, importation, or distribution of a digital audio recording device, a digital audio recording medium, an analog recording device, or an analog recording medium, or based on the noncommercial use by a consumer of such a device or medium for making digital musical recordings or analog musical recordings.
Furthermore, in
17 USC 1001 a "digital audio recording medium" is defined as:
A “digital audio recording medium” is any material object in a form commonly distributed for use by individuals, that is primarily marketed or most commonly used by consumers for the purpose of making digital audio copied recordings by use of a digital audio recording device.
(B) Such term does not include any material object—
(i) that embodies a sound recording at the time it is first distributed by the importer or manufacturer; or
(ii) that is primarily marketed and most commonly used by consumers either for the purpose of making copies of motion pictures or other audiovisual works or for the purpose of making copies of nonmusical literary works, including computer programs or data bases.
In layman's terms, this refers to the "Audo CD" discs that you can buy most places where you can buy Data CDs. Those CDs are special in that they cost more. They cost more because each time you buy one, a royalty payment is made which eventually filters its way into the RIAA's pocket. The definition specifically excludes the other "data type" CD discs (that's what that "ii" subsection is).
However, be careful because Computers themselves are not defined as digital audio recording devices. From
17 USC 1001:
(3) A “digital audio recording device” is any machine or device of a type commonly distributed to individuals for use by individuals, whether or not included with or as part of some other machine or device, the digital recording function of which is designed or marketed for the primary purpose of, and that is capable of, making a digital audio copied recording for private use, except for—
(A) professional model products, and
(B) dictation machines, answering machines, and other audio recording equipment that is designed and marketed primarily for the creation of sound recordings resulting from the fixation of nonmusical sounds.
The courts have ruled that computers are not covered by the AHRA because they are
not "designed or marketed for the primary purpose of, and that is capable of, making a digital audio copied recording for private use". They have lots of other uses and purposes. That's GOOD in many ways, because the AHRA also defines a special DRM scheme that prevents these Audio CD Recorders from using standard Data CDs (and does some other nefarious stuff), and if a computer was covered by the AHRA the manufacturers would be forced to implement the DRM scheme.
But... The take home is, as long as you do it with a standalone (non-professional) CD recorder, you use the more-expensive Audio CD-R discs, and you do it not-for-profit (including selling ads or any other sneaky schemes), you are free to make as many copies of borrowed discs as you want, give them away to friends, and anything else you want with them.
In the US, of course, that is. And, Shhhhh... The RIAA certainly doesn't want people to know this. Even though it was them that lobbied heavily for the law (they wanted the payola from the sale of those Audio CDs, they just didn't want people to know that they could do it legally).
The RIAA certainly doesn't like systems like this CD trading service, since they exploit a perfectly legal loophole in the copyright regime (one they created themselves). But there's little they can do about it realistically. They could try to sue the "owners" of the service and prove that most users are not following the AHRA properly, and thereby infringing, and thereby the "owners" of the service are profiting from the infringement (ala Napster). This might be a difficult case to prove though, and it would draw unwanted attention to the loophole they hope no one notices. Plus, the "owners" could avoid the whole thing by incorporating as a non-profit org.