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"It was a Very Good Year" - 1959 Ruling Stands the Test of Time

Channeling Frank Sinatra this month, I turn my attention to Revenue Ruling 59-60. This key valuation document issued back in 1959 states that its purpose is to "outline and review the approach, method and factors to be considered in valuing shares of.... closely held companies for estate and gift tax purposes". Its scope was extended by Revenue Ruling 65-192 to include income taxes. In the recent Federal case of J&M Distributing, Inc. v. Hearth & Home Technologies, Inc. (2015 U.S. Dist. LEXIS 2314) the plaintiff claimed that its damages for breach of contract were tied to the fair market value of its business. In establishing that value, the plaintiff's expert relied on guidance from Revenue Ruling 59-60. The defendant however, claimed that the Ruling 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 a variety of contexts and quoted with approval an article stating that "its usage has spread as it routinely referenced and used in the valuation of closely held businesses for various litigation purposes and its principles are applicable in the valuation of most closely-held businesses".

 

The court's approach accords with good sense: Revenue Ruling 59-60 includes the classic formulation of the "willing buyer/willing seller" fair market value standard and gives a listing of eight key factors to consider in the valuation process. While different standards 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 forms the basis of most valuation engagements.