Microsoft Word peachtree case study
Revenue Ruling 59‐60: Valuation of Closely‐Held Stocks
Download 0.84 Mb. View original pdf
|
| 2.5 Revenue Ruling 59‐60: Valuation of Closely‐Held Stocks Primary reliance is placed on many of the elements listed in Internal Revenue Service Ruling 59‐60, which describes guidelines for the valuation of closely‐held stocks. Revenue Ruling 59‐60 explicitly states that all relevant factors should betaken into consideration, including the following • The nature of the business and the history of the enterprise from its Inception. (Reference Section 4.0 Analysis of Subject Company) • The economic outlook in general and the condition and outlook of the specific industry in particular. (Reference Section 3.0 Economic and Industry Review) • The book value of the stock and financial condition of the business. (Reference Section 4.8 Company Financial Review) • The earning capacity of the company. (Reference Section 4.8 Company Financial Review) • The dividend‐paying capacity of the company. (Reference Section 4.8 Company Financial Review) 5 Pratt, Shannon P, Robert F. Reilly, and Robert P. Schweihs. 1989. Valuing a business The analysis and appraisal of closely held companies, 2nd edition. Chicago Dow Jones‐Irwin. p. 29. 6 Pratt, Shannon P, Robert F. Reilly, and Robert P. Schweihs. 1989. Valuing a business The analysis and appraisal of closely held companies, 2nd edition. Chicago Dow Jones‐Irwin. p. 29. Page 22 of 141 • Whether or not the enterprise has goodwill or other intangible value. (Reference Section 5.0 Valuation Analysis and Calculations) • Sales of the stock and the size of the block of stock to be valued. (Reference Section 4.2 Prior Transactions) • 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. (Reference Section 5.1 Application of the Market Approach) Each valuation is unique therefore, there is no set formula to the approach and methods to be used in determining the fair market value of a given business. Different methods will be applicable indifferent situations based on a variety of circumstances. Business valuation is not an exact science Revenue Ruling 59‐60 states that a sound valuation will be based on all relevant facts, but the elements of commonsense, informed judgment, and reasonableness must enter into the process of weighing those facts and determining their aggregate significance In addition, the formula approach, promulgated in Revenue Ruling 68‐609, has been used for valuing intangibles when no better method exists. This means that the valuation relies on fair market value of net tangible assets, earning a fair return plus capitalization of excess earnings. The fair market value of specific shares of stock in an unlisted corporation will vary as general economic conditions change. Uncertainty as to the stability or continuity of future Income from the business decreases its value because of the increased risk of loss in the future. In summary, the valuation of shares of stock of a closely‐held company with uncertain future prospects is a highly speculative procedure. There is no single formula acceptable for determining the fair market value of a closely‐held business therefore, the valuator must look to all relevant factors to establish the fair market value of a business as of a given date. To establish a uniform system for valuing businesses, the Internal Revenue Service issued Revenue Ruling 59‐60, which lists the factors to consider. |