Really? Would you mind pointing out where in the US Code or the DMCA (or whatever else you're referring to) that says this? I'm not as knowledgeable on copyright as I'd like to be; need to start learning more somewhere, and this seems like a good place.
The TiVo Question: Does Skipping Commercials Violate Copyright Law? http://papers.ssrn.com/sol3/papers.cfm?abstract_id=901062
Please don't mistake my opinion here on what the law is for my feelings on what the law should be. It sounds like a great app. I'd be very happy to proven wrong, and to find that the copyright law regarding such matters is more user friendly than I've been led to believe.
Consider ripping your CDs so you can play them on your MP3 player. Legal. Selling those MP3s? Not legal.
You are right that ripping a CD (that you own?) to MP3 for personal use is covered as fair use. This was established relatively recently in RIAA vs Diamond Multimedia[1], a case that primarily decided that the Rio was legal because it _wasn't_ a digital music recorder. But it also stated "the Rio's operation is entirely consistent with the Act's main purpose -- the facilitation of personal use" and that "Such copying is paradigmatic noncommercial personal use entirely consistent with the purposes of the Act".
But simply transforming a musical recording into a different format isn't quite a parallel example, as the goal is usually to make a complete copy. I think a closer parallel would be recording a television show with the ads clipped out. While 'time-shifting' is held to be legal (under Sony vs Universal), if you save a version with advertisements removed, you may well have created a derivative work.
I think Tivo is probably a pretty close example. While I don't think there has been a precedent setting case yet, it's probably worth noting that Tivo does not allow its users to automatically skip advertisements in the shows it records, despite the fact that this would be a popular feature with users. They no longer even have a button on the remote to allow the ads to be skipped easily.
For example, a law review article[2] titled "The TiVo Question: Does Skipping Commercials Violate Copyright Law?" reaches this simple conclusion: "Using a DVR to skip television advertisements violates copyright law, and DVR manufacturers should be contributorily liable. By providing a means for television viewers to skip advertisements, DVR manufacturers deny television networks the intended incentive for their creative expression--advertising revenues."
I've only skimmed it, but the article provides a lot of useful background on the relevant arguments and case law.
[1] http://www.virtualrecordings.com/diamond.htm
[2] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=901062
Yes, and by allowing users to share MP3's of your songs you may find that over the long run your listenership is improved.
Nonetheless, under current (US?) copyright code, reformatting documents by stripping out 'extraneous' advertising and saving them in a different format for later use is flat-out illegal. This may not make it 'wrong', and certainly does not make the app any less useful, but I think the OP's point stands.