Dictionary of Exit Planning Terms

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IRS Ruling 59-60

The revenue ruling 59-60 was issues by the IRS over 40 years ago and defines how to value the shares of capital stock of a closely-held corporation.  Although commonly used for estate and gift tax calculations, it is also used for other litigation purposes.  The ruling focuses on defining Fair Market Value, which is defined as "the priced at which the property would change hands between and 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, with both parties having reasonable knowledge of relevant fact."

The ruling then defined eight specific factors that should be considered in all valuations:

  1. The nature of the business and the history of the enterprise from its inception.
  2. The economic outlook in general and the condition of the specific industry in particular.
  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 or not the enterprise has goodwill or other intangible value.
  7. Sales of the stock and the size of the block of stock to be valued.
  8. The market price of stocks of corporations engaged in the same or similar line of business having their
    stocks actively traded in a free and open market either on an exchange or over-the –counter.