Quick Answer: Revenue Ruling 59-60 is the IRS framework for determining the fair market value of stock in closely held companies. Issued in 1959, it lists eight specific factors appraisers must consider, from the company’s history to comparable public company stock prices. Despite its age, it remains the foundational standard the IRS, courts, and valuation professionals use in nearly every tax-related business valuation today.
What Is Revenue Ruling 59-60?
Revenue Ruling 59-60 is a piece of IRS guidance, originally issued in 1959, that lays out the approach and factors used to determine the fair market value of stock in closely held corporations. The ruling was created for a specific purpose: to give the IRS, taxpayers, and appraisers a consistent framework for valuing private-company shares for estate and gift tax filings.
What makes the ruling remarkable is how broadly it has been adopted beyond that original use. Over six decades later, Revenue Ruling 59-60 is still the foundational standard for business valuation in the United States. It is cited routinely in estate and gift tax matters, charitable contributions, buy-sell agreements, shareholder disputes, divorce settlements, employee stock ownership plans, SBA loans, and most M&A valuation work. The IRS evaluates valuations against it. Courts expect to see it. Appraisers are expected to address it explicitly in their reports.
There is a simple reason for that staying power: the ruling rejected rigid formulas in favor of professional judgment applied to a defined set of factors. That framework has aged well, and it maps cleanly to the three modern valuation approaches (income, market, and asset) that valuation professionals use today.
Why Revenue Ruling 59-60 Still Matters
For any business valuation prepared for tax purposes, compliance with Rev. Rul. 59-60 is effectively mandatory. A valuation report that does not address the eight factors can be rejected by the IRS, with consequences ranging from rejected deductions to penalties and increased tax liability. Beyond tax matters, the ruling has become the common framework that judges, lawyers, and appraisers rely on in shareholder disputes, divorce settlements, ESOPs, Section 409A valuations, SBA-financed acquisitions, and most M&A work involving private companies.
The cost of getting a tax-related valuation wrong is real. An undervaluation can trigger an IRS challenge with back taxes and penalties; an overvaluation creates unnecessary tax exposure. A defensible valuation grounded in Revenue Ruling 59-60 is what protects against both.
Fair Market Value: The Standard Behind the Ruling
Revenue Ruling 59-60 is built on a specific definition of fair market value: the price at which property would change hands between a willing buyer and a willing seller, neither under compulsion and both with reasonable knowledge of relevant facts. This is the standard most business valuations are measured against, and it carries several assumptions that shape the analysis:
- The buyer and seller are hypothetical, not specific real parties. A strategic acquirer who would pay a premium does not establish FMV.
- Neither party is under compulsion. A distressed sale below market does not reflect FMV.
- Both parties have reasonable knowledge of the business and its market.
- The transaction is for cash or its equivalent at a single point in time.
These assumptions explain why an FMV figure under Rev. Rul. 59-60 often surprises owners. It is not the “street price” a real, motivated buyer might pay; it is the price the market in the abstract would arrive at, with appropriate discounts where they apply.
The Eight Factors of Revenue Ruling 59-60
The core of the ruling is its list of factors an appraiser must consider. The eight factors are not equally weighted in every case, the appraiser exercises judgment about which matter most, but all eight must be addressed and documented.
- The nature of the business and its history. What the company does, how long it has been operating, how it has evolved, who runs it, and its competitive position. A stable, lengthy operating history typically supports a higher valuation multiple; a short or volatile history points to higher risk.
- The economic outlook and the condition of the industry. Both the broader economic environment and the specific industry’s maturity, growth prospects, and competitive dynamics. A growing industry supports valuations differently than a declining one.
- The book value and financial condition of the business. Several years of balance sheets are reviewed for liquidity, working capital, fixed assets, debt levels, and capital structure. Book value is rarely the answer by itself, but it is a baseline.
- The earning capacity of the company. Often the most important factor. The appraiser analyzes several years of income statements, normalizes for nonrecurring or discretionary items, and assesses the company’s true earnings power. A business is fundamentally worth what it can earn going forward.
- The dividend-paying capacity. Not just historical dividends, but what the business could sustainably distribute after meeting its operating and capital needs. For many closely held companies, dividends are minimal because profits are reinvested, but the capacity still matters.
- Goodwill and intangible value. Brand, customer relationships, trade secrets, patents, key contracts, institutional knowledge, longevity, and reputation. Intangible value is a significant portion of total value in most operating companies.
- Prior sales of stock and the size of the block being valued. Any prior arm’s-length sales of the company’s shares, and whether the block being valued is a controlling or non-controlling interest. A minority stake is worth less per share than a controlling one.
- Market prices of comparable publicly traded companies. Trading multiples (price-to-earnings, EV/EBITDA, and others) of similar public companies serve as a benchmark, with adjustments for differences in size, growth, and risk.
A valuation that addresses these eight factors, with documented analysis and reasoning, is what the IRS, courts, and serious buyers expect to see.
How the Eight Factors Map to Modern Valuation Approaches
Although Revenue Ruling 59-60 predates much of modern valuation theory, its eight factors map cleanly to the three valuation approaches used today:
- Income approach (earning capacity, dividend-paying capacity): values the business based on its ability to generate future cash flows.
- Market approach (prior stock sales, comparable public companies): values the business against actual transactions and trading multiples.
- Asset approach (book value, financial condition, goodwill): values the business based on its underlying assets and intangibles.
A qualified appraiser typically considers all three, weights them based on what fits the specific business, and reconciles them into a defensible value range. The ruling cautions explicitly against mechanically averaging the three approaches; the goal is informed judgment, not a formula.
Valuation Discounts: A Critical Refinement
Revenue Ruling 59-60 also recognizes that not all interests in a closely held business are worth the same per share. Two common discounts can materially affect FMV:
- Discount for lack of control (minority discount). A non-controlling stake cannot direct strategy, distributions, or a sale, so it is worth less per share than a controlling interest.
- Discount for lack of marketability (DLOM). Shares in a private company cannot be sold in a liquid public market, so they are worth less than an otherwise-identical liquid investment. Later court decisions, most notably Mandelbaum, refined how appraisers calculate this discount.
These discounts can be substantial, often 20-40% combined, and the IRS scrutinizes them carefully in audits. Their proper application is one of the areas where experienced, credentialed appraisers earn their value.
Why a Closely Held Business Needs a Proper Valuation
A closely held business is one without publicly traded shares. That includes most family businesses, partnerships, and privately owned companies. The absence of a public market for the shares is exactly what makes Rev. Rul. 59-60 necessary: there is no daily price to look up, so a structured framework is required to arrive at a defensible value.
For owners, this is not an abstract concern. A defensible valuation of a closely held business is the foundation for estate planning, succession decisions, buy-sell agreements, shareholder transactions, and eventual sale. Owner estimates, rules of thumb, or industry multiples applied casually do not meet the standard the IRS or courts require. A formal valuation that addresses the eight factors does.
This is also part of the broader picture of business exit planning. The same factors that drive an FMV conclusion under Rev. Rul. 59-60 (earnings, growth, intangible value, customer concentration, owner dependence) are the factors an owner can work on in the years before a sale. An early valuation under the Rev. Rul. 59-60 framework is less about the number and more about the diagnosis.
Selling or Transitioning Your Business? Talk With MBO Ventures
A defensible valuation is the foundation of nearly every important business transition decision, and Revenue Ruling 59-60 is the framework that makes a valuation defensible in tax and legal contexts. From understanding what your closely held business is worth, to weighing what a transition could look like, to working with the right advisors and consultants, the quality of guidance shapes the outcome.
A starting business valuation tells you where you stand today. For a wider view of the process, see our guide on how to sell your business.
If a business sale or ownership transition is on your horizon, this year or several years out to talk through your situation and your options.
FAQs About Revenue Ruling 59-60
What is Revenue Ruling 59-60?
Revenue Ruling 59-60 is IRS guidance issued in 1959 that establishes the framework for determining the fair market value of stock in closely held companies. It identifies eight specific factors appraisers must consider and is the foundational standard the IRS, courts, and valuation professionals use across nearly every tax-related business valuation today.
What are the eight factors of Revenue Ruling 59-60?
The eight factors are: (1) the nature and history of the business; (2) the economic outlook and industry condition; (3) book value and financial condition; (4) earning capacity; (5) dividend-paying capacity; (6) goodwill and intangible value; (7) prior sales of stock and the size of the block being valued; and (8) market prices of comparable publicly traded companies. All eight must be addressed in a valuation report.
What is a closely held business?
A closely held business is a company whose shares are not actively traded on a public stock exchange. It includes most family-owned businesses, partnerships, and privately held companies. Because there is no daily market price, closely held businesses require a structured valuation framework, which is exactly what Revenue Ruling 59-60 provides.
How do you value a privately held company under Revenue Ruling 59-60?
A qualified appraiser addresses each of the eight factors, applies the three valuation approaches (income, market, and asset), and weights them based on what fits the specific business. The appraiser also applies appropriate discounts (typically for lack of control or lack of marketability) where the interest being valued warrants them. The result is a documented, defensible fair market value.
Is Revenue Ruling 59-60 still used today?
Yes. Despite being over 60 years old, Revenue Ruling 59-60 remains the foundational standard for business valuation in the United States. The IRS continues to cite it in audits, courts rely on it in tax and shareholder disputes, and credentialed appraisers are expected to address all eight factors in any valuation report prepared for tax purposes.
When do I need a valuation that follows Revenue Ruling 59-60?
Any time the value of a closely held business needs to hold up to the IRS or a court. Common situations include estate and gift tax filings, charitable contributions, buy-sell agreement triggers, divorce or shareholder disputes, ESOPs, Section 409A valuations for stock options, and M&A transactions where tax treatment depends on the valuation.