4 KEY IRS rulings at a glance

The Treasury Department periodically issues revenue rulings to help interpret tax laws. These interpretive rulings don’t carry the same weight as the Internal Revenue Code, but they do clarify complex or ambiguous topics — including business and intangible asset valuations. The most noteworthy valuation-related revenue rulings include:

1. Revenue Ruling 59-60 - Issued nearly 50 years ago, this ruling is considered landmark precedent that has withstood the test of time. In addition to providing the most-cited definition of fair market value, this pronouncement identifies eight factors to consider when valuing a closely held corporation:

• The nature of the business and its history,
• The general economic and industry outlooks,
• The company’s book value and financial condition,
• The company’s earnings capacity,
• The company’s dividend-paying capacity,
• Goodwill or other intangible value,
• Previous sales of stock and size of the blocks, and
• Market prices of comparable stocks.

Revenue Ruling 59-60 also advises valuators to consider the effect of restrictive shareholder agreements on stock value, but only if they represent bona fide business arrangements.

2. Revenue Ruling 68-609 - The Treasury Department originally created the excess earnings (or formula) method to estimate the intangible value of breweries and distilleries during prohibition. This ruling discusses the underpinnings of the excess earnings method but states that it “may be used for determining the fair market value of intangible assets of a business only if there is no better basis available.”

3. Revenue Ruling 77-287 - In 1977, the IRS officially recognized restricted stock studies as a source of empirical evidence for marketability discounts. This ruling discusses various types of restricted securities and the SEC’s Institutional Investor Study, which identifies four factors that influence marketability discounts: earnings, sales, trading market and resale agreement provisions.

Revenue Ruling 77-287 lists other factors — such as previous offers, trading volume, shareholder relationships and elements of control — to consider when quantifying marketability discounts.

4. Revenue Ruling 93-12 - Until 1993, minority interests transferred for gift and estate tax purposes were typically subject to family attribution. This ruling reversed the family attribution rules and allowed minority discounts on partial interest transfers regardless of the parties’ family ties.

These rulings may be cited in valuations prepared for nontax purposes, including divorce and shareholder disputes. So it’s important to understand these pronouncements before relying on a business valuation for any purpose.