Revenue Ruling 59-60 and the Valuation of Closely Held Businesses
Valuation issues arise frequently for owners of closely held businesses, particularly when equity is issued, transferred, or taxed. Unlike publicly traded companies, private corporations lack an observable market price for their stock. To address this gap, the Internal Revenue Service relies on Revenue Ruling 59-60, which remains the foundational authority for determining the fair market value of private company stock for federal tax purposes.
Business owners, professionals, and families engaging in equity planning should understand how this guidance applies and why it continues to govern private business valuations more than six decades after its issuance.
Overview of Revenue Ruling 59-60
Revenue Ruling 59-60 was issued by the IRS in 1959 to provide guidance on valuing stock of closely held corporations for estate and gift tax purposes. Over time, its principles have been broadly adopted in other tax and legal contexts, including:
Restricted stock grants and 83(b) elections
Gifting and intra-family transfers
Buy-sell agreements and redemptions
Divorce and shareholder disputes
Succession and estate planning
Courts, valuation professionals, and the IRS consistently rely on Rev. Rul. 59-60 as the starting point for determining fair market value where no public market exists.
Definition of Fair Market Value
Revenue Ruling 59-60 defines fair market value as:
The price at which 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 emphasizes that fair market value is an objective, hypothetical standard. It is distinct from book value, investor pricing, or an owner’s subjective expectations.
The Required Valuation Factors
Rev. Rul. 59-60 does not prescribe a formula. Instead, it requires consideration of all relevant facts and circumstances, including the following non-exclusive factors:
1. Nature and History of the Business
This includes the company’s formation, ownership structure, operational history, and stage of development.
2. General Economic Outlook and Industry Conditions
Valuation must reflect prevailing economic conditions and trends within the company’s specific industry.
3. Book Value and Financial Condition
While book value may provide a baseline, it is rarely determinative, particularly for service-based businesses.
4. Earnings Capacity
Earnings history and future earning potential are often the most significant considerations for operating companies. For professional practices, normalization of owner compensation is critical.
5. Dividend-Paying Capacity
The ability of the business to generate distributable cash is relevant, regardless of whether dividends are actually paid.
6. Goodwill and Intangible Assets
This may include brand value, client relationships, and workforce. In professional practices, a key issue is whether goodwill is personal or enterprise-related.
7. Prior Sales of Stock
Recent arm’s-length transactions involving the company’s stock may provide meaningful valuation evidence if they are comparable and bona fide.
8. Market Prices of Comparable Companies
When available, market data from comparable public companies or private transactions may inform valuation, subject to appropriate adjustments.
No single factor is controlling, and valuation requires the exercise of informed judgment.
Absence of Mechanical Rules
A central principle of Rev. Rul. 59-60 is the rejection of rigid valuation formulas or rules of thumb. The IRS expressly recognized that closely held businesses vary widely and that valuation must be grounded in a comprehensive analysis of the specific facts.
As a result, valuations based solely on revenue multiples or simplistic benchmarks are often insufficient for tax-sensitive purposes.
Discounts Applicable to Closely Held Stock
Revenue Ruling 59-60 also acknowledges that ownership interests in private companies may warrant valuation discounts not applicable to publicly traded stock. Common adjustments include:
Discounts for lack of marketability
Minority interest discounts, where applicable
These discounts can materially affect fair market value and are frequently examined by the IRS in audits and disputes.
Practical Implications for Business Owners
Owners should be mindful that Rev. Rul. 59-60 applies implicitly whenever private company equity is valued for tax or legal purposes. This includes situations such as issuing restricted stock, filing an 83(b) election, transferring interests to family members, or planning ownership transitions.
Failure to adhere to these principles can result in adverse tax consequences, including recharacterized income, penalties, and interest.
Revenue Ruling 59-60 remains the cornerstone of private business valuation in the United States. Any transaction involving closely held stock should be evaluated through its lens. Proper valuation is not merely a technical exercise, it is a critical component of sound legal and tax planning.
For guidance on valuations, equity issuances, or ownership planning, contact us to schedule a consultation.