Revenue Ruling 59-60 is arguably the most important document in business valuation—yet many business owners have never heard of it. Published by the Internal Revenue Service in 1959, this ruling establishes the foundational framework that courts, appraisers, and tax authorities use to determine fair market value for nearly every business valuation scenario. Understanding Rev. Ruling 59-60 is essential for anyone who owns a business, particularly if you’re engaged in estate planning, tax compliance, litigation, or contemplating a transaction. This guide explains what it is, why it matters, and how it applies to your situation.
What is Revenue Ruling 59-60?
Revenue Ruling 59-60 is an official IRS pronouncement that defines the standard for determining fair market value in business valuations. It establishes the valuation methodology that the IRS expects appraisers to follow for income tax, estate tax, gift tax, and other tax-related valuations.
At its core, Rev. Ruling 59-60 defines fair market value as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”
This definition has remained the standard for over 60 years because it captures the essence of what a business is truly worth in an arm’s length transaction. It’s not about fire-sale liquidation prices, distressed transactions, or forced sales. Rather, it reflects what an informed, rational buyer would pay for your business in normal market conditions.
Why the IRS Created It
Before 1959, business valuations were inconsistent and often arbitrary. Business owners and their tax advisors used wildly different approaches, leading to disputes with the IRS over reported valuations. The IRS needed a consistent, defensible framework for evaluating business values in tax matters. Rev. Ruling 59-60 provided that framework and has become the gold standard adopted not just by the IRS, but by courts, appraisers, and valuation professionals nationwide.
The Eight Factors: The Core of Rev. Ruling 59-60
The heart of Revenue Ruling 59-60 lies in eight specific factors that appraisers must consider when valuing a business. These factors aren’t equally weighted in every situation—the appraiser must exercise professional judgment about which factors are most relevant to the specific business and valuation purpose. However, all eight factors must be addressed and documented.
Factor 1: The Nature of the Business and Its History
The first factor requires appraisers to understand what your business actually does, how long it’s been operating, and its evolution over time. This includes analyzing the industry in which you operate, the competitive landscape, your market position, and business stability. A 25-year-old established manufacturing company has different valuation characteristics than a three-year-old technology startup. Similarly, a company facing industry disruption is valued differently than one in a stable, mature industry.
Factor 2: The Economic Outlook and Industry Conditions
This factor examines general economic conditions and industry-specific trends at the time of valuation. Are we in a recession or growth phase? Is interest rate rising or falling? Is your industry experiencing growth, decline, or consolidation? Is technology disrupting your industry? These macroeconomic and industry trends significantly affect how much a buyer would pay for your business.
Factor 3: Book Value and Financial Condition
This factor addresses the strength of your company’s balance sheet. What are your assets, liabilities, and equity? Is your company well-capitalized or leveraged? Do you have significant intangible assets that don’t show on the balance sheet but drive profitability (like strong customer relationships or proprietary processes)? The difference between book value and market value often reveals valuable intangible assets that only a professional valuation can fully capture.
Factor 4: Earning Power and Dividend-Paying Capacity
Perhaps the most critical factor, this examines your company’s historical earnings and its ability to generate future profits. Appraisers analyze revenue growth, profit margins, cash flow generation, and earnings trends. They adjust for one-time gains or losses, owner discretionary expenses, and other items that affect normalized profitability. A company’s value is fundamentally tied to the cash it generates—and a buyer is paying for future earning capacity, not just past results.
Factor 5: Dividend History and Policy
Although less applicable to many closely-held businesses, this factor considers whether your company has a history of paying dividends to owners and its dividend policy. For many family businesses and closely-held companies, dividends may be minimal or nonexistent as owners reinvest profits back into the business. However, the question remains: what could an owner reasonably expect to extract from the business as economic benefit?
Factor 6: Whether the Business is Dependent on Key Persons
This factor examines management depth and key person risk. Does the business depend primarily on one or two key individuals? What happens to profitability if that person leaves? A business with strong, deep management is typically valued higher than one dependent on a few key people. This often affects valuation through a “key person discount” or consideration of management’s replaceability.
Factor 7: Any Relevant Previous Sales or Valuations
Previous valuations, recent stock sales among shareholders, or prior business sales provide important market data. If your company had minority shares sold at a certain price within the past few years, that’s evidence of current fair market value. Similarly, if you’ve had a formal valuation performed recently for another purpose, that provides a benchmark for current valuation (adjusting for the passage of time and any changed circumstances).
Factor 8: Market Price of Similar Securities
The final factor examines market data from comparable companies. For your industry, what prices have comparable companies commanded in acquisitions? What multiples do publicly traded competitors trade at? While perfect comparables rarely exist, this market data provides a reality check and context for valuation conclusions. A buyer won’t pay significantly more for your business than they could pay for a similar alternative.
Why Rev. Ruling 59-60 Matters for Every Valuation
While officially an IRS pronouncement, Revenue Ruling 59-60 has become the universal standard for business valuation across all contexts—not just tax matters. Courts cite it in litigation. Appraisers follow it in estate planning situations. Lenders reference it when evaluating collateral. Why? Because it’s been tested, refined, and proven through decades of court cases, tax audits, and practical application.
IRS Reliance on Rev. Ruling 59-60
When the IRS challenges a business valuation in an estate tax return, gift tax return, or income tax matter, the agency evaluates the valuation against Rev. Ruling 59-60 standards. If your appraiser followed the eight factors and documented the analysis properly, your valuation is defensible in an IRS audit. If corners were cut or factors ignored, the IRS has grounds to challenge the valuation and impose penalties.
Court Acceptance and Precedent
Courts—from tax courts to state courts handling divorce or partnership disputes—rely on expert witnesses who explain how they applied Rev. Ruling 59-60 factors to reach their conclusions. The ruling provides a common language and framework that judges understand and expect. An expert who ignores Rev. Ruling 59-60 or fails to address all eight factors faces credibility challenges in court testimony.
Evolution of Rev. Ruling 59-60 Through Court Decisions
Revenue Ruling 59-60 has been supplemented and refined through landmark court decisions that clarified specific aspects of the ruling and introduced new analytical frameworks.
Estate of Mandelbaum (1995)
This significant court case refined how appraisers calculate discounts for lack of marketability. The Mandelbaum decision provided factors for assessing what percentage discount should be applied to reflect that a minority interest in a closely-held business isn’t readily marketable like public stock. This case significantly influenced how appraisers apply and document DLOM (discount for lack of marketability).
Revenue Ruling 2003-28 and Restrictive Agreement Considerations
The IRS issued Rev. Ruling 2003-28 to address how buy-sell agreements and other restrictive agreements affect valuation. This ruling clarified when restrictions on transferability should reduce business value and when they might not apply. Understanding these rules is critical for businesses with buy-sell agreements or partnership restrictions.
How CVI Applies Rev. Ruling 59-60
At Corporate Valuations Inc., every appraisal—regardless of purpose—is anchored in Rev. Ruling 59-60 principles. Our ASA and CFA-credentialed appraisers ensure that all eight factors are analyzed, documented, and appropriately weighted based on the specific business and circumstances.
We go beyond a cursory checklist of the eight factors. Instead, we conduct deep analysis of each relevant factor, gather supporting documentation, apply multiple valuation methodologies, and triangulate to a well-supported conclusion. This rigorous approach ensures your valuation withstands scrutiny whether the purpose is tax compliance, litigation defense, estate planning, or transaction preparation.
Our experience across diverse Pacific Northwest industries—from manufacturing and distribution to professional services and technology—gives us perspective on which Rev. Ruling 59-60 factors are typically most important for your specific industry and business model.
Documentation for Defensibility
Whether your valuation will face IRS scrutiny or expert testimony in litigation, comprehensive documentation of how each Rev. Ruling 59-60 factor was analyzed is essential. Our appraisal reports include detailed sections addressing each factor, explaining our analysis, and showing how conclusions were developed. This documentation-first approach means your valuation is defensible from day one.
Key Takeaways
Revenue Ruling 59-60 is the foundation of business valuation. Understanding its eight factors helps you appreciate what appraisers analyze when determining your company’s fair market value.
Fair market value requires arm’s length conditions. The ruling’s definition assumes a willing buyer and willing seller with reasonable knowledge of facts—not distressed sales or special circumstances.
All eight factors must be addressed. Professional appraisers don’t cherry-pick factors; they analyze each and document how it affects valuation.
Court decisions have refined the ruling. Landmark cases like Estate of Mandelbaum have clarified specific issues like discount calculations, making modern appraisals more consistent and defensible.
Need a Rev. Ruling 59-60 Compliant Valuation?
Corporate Valuations Inc. specializes in valuations grounded in Revenue Ruling 59-60 principles. Whether you need a valuation for estate and gift tax purposes, general business appraisal, litigation support, or divorce proceedings, our ASA and CFA-credentialed appraisers deliver thorough, defensible analyses.
Blake J. Runckel, President, brings 40+ years of experience applying Rev. Ruling 59-60 in countless valuations across the Pacific Northwest. We understand how to address each of the eight factors in your specific industry and circumstances, ensuring your valuation withstands any scrutiny.
Contact us today for a confidential consultation about your valuation needs. Let’s discuss how we can provide you with a professional, well-documented appraisal grounded in time-tested principles.