The thrust of this series is to educate the attorney on what is expected to be performed in doing a business valuation for both non-litigation and litigation cases. We will discuss the issues addressed in Revenue Ruling 59-60 and the treatises that have evolved from it.
Revenue Ruling 59-60, Fair Market Value
What is Revenue Ruling 59-60 and its impact on the business valuation expert? The Revenue Ruling was published by the Internal Revenue Service in 1959 and was the sixtieth ruling published that year. It was written primarily Estate and Gift Tax valuations. However, it has evolved as the foundation for use by all business valuations globally.
Revenue Ruling 59-60 is the impetus for all business valuations all over the world. I had an opportunity to speak at a business valuation conference in Frankford Germany a number of years ago. The presenter was a Ph.D. from Munich and his presentation was on Fair Market Value. The thing I found most interesting was that the German and the US definitions of Fair Market Value were almost identical.
A global industry has evolved from this Revenue Ruling. Revenue Ruling 59-60 is the foundational document for all business valuations. Attorneys working in: divorces, adequacy of life insurance, buy/sell agreements, charitable contributions, employee stock ownership plans, family limited partnerships, shareholder disputes, etc. should be familiar what is expected of the business valuation expert. There are a number of treatises that have evolved over time into what is considered Generally Accepted Appraisal Practices that should be followed by business valuation experts.
Generally Accepted Appraisal Practices are those approaches, related methodologies and procedures there under, which have been peer reviewed, exposed to publication, and which can be reasonably expected to be used by business valuation experts regularly conducting engagements under similar facts and circumstances.
When assessing general acceptability and creditability,[1] a the business valuation expert may be guided by the following sources of generally accepted appraisal practices and procedures, as deemed appropriate given the facts and circumstances under the consideration, and the application of informed judgment:
1) Revenue Ruling 59-60
2) Professional Standards promulgated by accrediting organizations
3) Uniform Standards of Professional Appraisal Practice (USPAP)
4) Published Treatises which have been generally embraced by valuation practitioners
The Eight Factors of Revenue Ruling 59-60
The following are eight factors that are in Revenue Ruling 59-60. I will be discussing all of these items plus the Professional Standards and Published Treatises in later presentations so that you will have a better understanding of business valuations issues and be better prepared to deal with your and the opposing experts.
(a) The nature of the business and the history of the enterprise from its inception.
(b) The economic outlook in general and the condition and outlook of the specific industry in particular.
(c) The book value of the stock and the financial condition of the business.
(d) The earning capacity of the company.
(e) The dividend‑paying capacity.
(f) Whether or not the enterprise has goodwill or other intangible value.
(g) Sales of the stock and the size of the block of stock to be valued.
(h) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over‑the‑counter.
With a better understanding of the Generally Accepted Appraisal Practices, the attorney will be better able to vet a true and experienced expert and determine if their business valuation expert has followed the recognized Professional Standards and Generally Accepted Appraisal Practices that are specific to business valuations. There are multiple volumes of information written on this topic.
[1] Uniform Standards of Professional Practice (“USPAP”), 2020-21 eUSPAP, Definition: worth of belief, paragraph 103-105.