Revenue Ruling 59-60, issued by the Internal Revenue Service in 1959, remains the foundational document for business valuation in the United States. Despite being over six decades old, this ruling continues to guide appraisers, the IRS, and the courts in determining the fair market value of closely held business interests for tax purposes. Every professional business appraiser should be thoroughly familiar with its requirements, and every business owner involved in a tax-related valuation should understand what it says.

The Eight Factors

Revenue Ruling 59-60 identifies eight factors that appraisers should consider when valuing closely held stock. These are: (1) the nature and history of the business, (2) the general economic outlook and the condition and outlook of the specific industry, (3) the book value of the stock and the financial condition of the business, (4) the earning capacity of the company, (5) the dividend-paying capacity, (6) whether the enterprise has goodwill or other intangible value, (7) sales of the stock and the size of the block of stock to be valued, and (8) the market price of stocks of corporations engaged in the same or similar line of business. While not every factor is equally relevant in every situation, a thorough valuation should address each one.

Fair Market Value Defined

The ruling defines fair market value as \”the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.\” This definition appears throughout tax law, estate planning, and court proceedings. It establishes a hypothetical transaction between informed, unrelated parties acting in their own self-interest — not the price that a specific buyer might pay or a specific seller might accept.

Why It Still Matters

Revenue Ruling 59-60 was written before modern valuation theory and methodologies were fully developed, yet its framework has proven remarkably durable. The eight factors map naturally to the three valuation approaches used today: the income approach (earning capacity, dividend-paying capacity), the market approach (comparable company analysis), and the asset approach (book value, financial condition). The IRS continues to cite this ruling in audit challenges, and courts regularly reference it when evaluating the credibility of expert valuation testimony.

Application in Gift and Estate Tax

For gift and estate tax valuations, compliance with Revenue Ruling 59-60 is essentially mandatory. A valuation that fails to address the eight factors may be deemed inadequate by the IRS, potentially resulting in penalties, increased tax liability, or both. The ruling also emphasizes that valuation is not an exact science and that sound judgment is essential. Mechanical application of formulas without consideration of all relevant factors is specifically cautioned against. This is why experienced, credentialed appraisers who exercise professional judgment within the framework of the ruling are essential for tax-related valuations.

Need a valuation that meets IRS standards under Revenue Ruling 59-60? Contact Corporate Valuations, Inc. Our ASA and CFA credentialed professionals have decades of experience preparing valuations that satisfy IRS requirements and withstand audit scrutiny.