Revenue Ruling 59-60 - the Bedrock of Valuation Theory

“It was a Very Good Year” – 1959 Ruling Stands the Test of Time
July 14, 2020

Channeling Frank Sinatra this month, I turn my attention to RevenueRuling 59-60. This key valuation document issued back in 1959 states that itspurpose is to “outline and review the approach, method and factors to beconsidered in valuing shares of …. closely held companies for estate and gifttax purposes”.  Its scope was extended byRevenue ruling 65-192 to include income taxes and other taxes.

In the recent Federal case of J&M Distributing Inc, Incv. Hearth & Home Technologies, Inc.  (2015 U.S. Dist. LEXIS 2314) the plaintiffclaimed that its damages for breach of contract were tied to the fair marketvalue of its business. In establishing that value, the plaintiff’s expertrelied on guidance from Revenue Ruling 59-60. The defendant claimed that theRuling only applied in tax related matters and not in damages calculations.

The court was unambiguous in its rejection of this position.It noted that Revenue Ruling 59-60’s general guidelines have been used in avariety of contexts and quoted with approval an article stating that “its usagehas spread as it is routinely referenced and used in the valuation of closelyheld businesses for various litigation purposes and its principles are applicablein the valuation of most closely-held business valuations”.

The court’s approach accords with good sense: Revenue Ruling59-60 includes the classic formulation of the willing buyer/willing seller fairmarket value standard and gives a listing of eight key factors to consider inthe valuation process.  While differentstandards of value may diverge from some of the fair market value assumptions,the Ruling’s general outline of what to consider in a valuation exercise formsthe basis of most valuation engagements.