What Are the Factors in Revenue Ruling 59-60?

Revenue Ruling 59-60 provides a foundational framework for valuing closely held corporations, which are businesses not publicly traded. The Internal Revenue Service (IRS) established this guidance primarily for estate and gift tax purposes, ensuring a consistent approach to determining a company’s worth when ownership shares are transferred. This ruling offers a structure for analysis, moving beyond simple formulas to incorporate a variety of business-specific attributes. Its principles are now widely applied in many valuation scenarios, including mergers and litigation support.

The Standard of Fair Market Value

At the core of Revenue Ruling 59-60 is the concept of Fair Market Value (FMV). The ruling defines FMV as the price at which a business interest would change hands between a willing buyer and a willing seller. This standard assumes that neither party is under any compulsion to act and that both have reasonable knowledge of all relevant facts concerning the business.

Key Valuation Factors

The ruling outlines eight factors that must be analyzed to determine the value of a closely held business.

• The nature of the business and its operational history to understand its stability and inherent risks.
• The economic outlook, which includes both general economic conditions and the specific trends and competitive landscape of the company’s industry.
• A company’s financial health as assessed by its book value and overall financial condition, often requiring a review of balance sheets from at least the prior two years.
• The earning capacity of the company, with an analysis typically extending to income statements from the previous five years to project future performance.
• The company’s dividend-paying capacity, which reflects its financial strength and ability to distribute profits to shareholders.
• The existence of goodwill or other intangible assets, such as brand reputation or customer relationships, which contribute to value when earnings exceed a normal return on tangible assets.
• Any prior sales of the company’s stock, paying attention to the size of the block of stock being valued and whether the transactions were at arm’s length.
• A comparison to the market price of stocks for similar, publicly traded companies to establish a valuation benchmark.

Applying the Valuation Factors

Revenue Ruling 59-60 does not provide a rigid mathematical formula for valuation; instead, it requires professional judgment to assign appropriate weight to each factor. The relevance of each factor shifts based on the specific characteristics of the business being valued. For an operating company, such as a manufacturer, its earning capacity is often the most significant element driving its value.

In contrast, for a business that primarily functions as an investment or real estate holding company, the value of its underlying assets carries more weight in the final determination. This flexible approach ensures the valuation reflects the true economic realities of the specific company.