Tax
Revenue Ruling 59-60 for Small Business Owners: What the IRS Weighs in Your Company's Value
Rev. Rul. 59-60 lists the eight factors the IRS weighs in a closely held company. Here is how each moves a small business owner's value, with a worked example.
By 409.AI Team - 2026-10-11
# Revenue Ruling 59-60 for Small Business Owners: What the IRS Weighs in Your Company's Value
If you own a small private company, the IRS has told you how it expects the business to be valued. It did so in 1959, in a six-page ruling that still anchors estate tax, gift tax and most court fights over closely held stock. Revenue Ruling 59-60 matters to you if a gift of shares, an estate, a partner's exit or a buyout is on the horizon, and to the CPA, attorney or lender who has to defend the number.
The ruling was written for stock of closely held corporations. Appraisers apply the same reasoning to LLC interests and partnerships, and to the sale of a whole company. This article walks through what the ruling actually says, which parts bite hardest on a business with one or two owners, and how the pieces move a real number.
What the ruling is, and what it is not
Revenue Ruling 59-60 is published at 1959-1 C.B. 237. Its stated purpose is to outline the approach, methods and factors for valuing shares of closely held corporations for estate tax and gift tax. It states that the same methods apply to stock where market quotations are unavailable or too scarce to reflect fair market value.
It is not a formula. The ruling says so directly: no formula can be devised that applies to the many valuation issues that come up, and valuation "is not an exact science." What it asks for instead is a sound judgment built on all the relevant facts, with "common sense, informed judgment and reasonableness" in the weighing.
It also fixes the definition every other conversation starts from. Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, when neither is under compulsion and both have reasonable knowledge of the relevant facts. A forced sale to a relative, or a price set between partners who are angry at each other, is not that.
If you want the contrast with a tax-compliance number you may already hold, our piece on [409A versus fair market value](https://www.409.ai/articles/409a-valuation-vs-fair-market-value) shows where the two definitions part ways.
The eight factors, in plain words
Section 4.01 lists eight factors that are "fundamental" and "require careful analysis in each case." The list is not exhaustive. Here is each one as a business owner meets it.
1. The nature of the business and its history
How long it has operated, how stable it has been, how diverse its customers and products are. The ruling says to give the most weight to recent years, and to discount events unlikely to recur. A one-time lawsuit settlement in 2021 should not drag on a 2026 value.
2. The economic and industry outlook
Where the economy stands on the valuation date, and where your industry stands against others. The ruling also asks whether your company is holding its position against competitors. A landscaping firm in a slowing housing market and a medical billing company in a growing one can post the same profit and deserve different values.
3. Book value and financial condition
The ruling asks for balance sheets for two or more years plus one at the month-end before the valuation date. It wants to see liquidity, working capital, debt and net worth. It also tells the appraiser to look at assets the business does not need to run, such as securities or spare real estate, and to restate investment-type assets at market value instead of cost.
4. Earning capacity
This is where most small business value lives. The ruling asks for detailed profit and loss statements over a representative period, preferably five years or more, with officer salaries shown in detail "if they seem to be excessive." The appraiser separates recurring from nonrecurring items, and operating income from investment income.
It also warns against lazy averaging. Arbitrary five-or-ten-year averages "without regard to current trends or future prospects will not produce a realistic valuation." If profits are climbing, the latest years get more weight.
5. Dividend-paying capacity
The test is what the company could pay, not what it did pay. Family-owned companies often pay little or nothing for tax reasons or because the owners take salary and bonus instead. The ruling notes that when a controlling interest is valued, the dividend factor is not a material element, because the controlling owner can swap dividends for pay.
6. Goodwill and other intangible value
The ruling says goodwill is based on earning capacity, specifically the excess of net earnings over a fair return on net tangible assets. Brand, trade name and a long record of operating in one locality can support intangible value too.
7. Prior sales of the stock and the size of the block
Past sales count only if they were at arm's length. The ruling says forced or distress sales do not ordinarily reflect fair market value, and isolated sales in small amounts do not necessarily control. It also says that control "may justify a higher value" for a specific block, which is the root of the control and minority discussions in valuation. We cover the minority side in [the discount for lack of control](https://www.409.ai/articles/discount-lack-of-control-dloc-409a-gift-tax-valuation).
8. Comparable public companies
Stock of similar businesses that trade actively on an exchange or over the counter. The ruling is careful here: a company with preferred stock and debt is not directly comparable to one with only common stock, and a declining company is not comparable to one in expansion. For a ten-person machine shop, true public comparables are rare, which is why appraisers also turn to data on private company sales.
The "one-man business" paragraph owners should read twice
Buried in the discussion of the economic outlook is a passage that applies to most small companies. The ruling says the loss of the manager of a "one-man" business may have a depressing effect on value, particularly where there is no trained personnel to succeed them. The effect on future expectancy and the lack of a management succession plan are "pertinent factors."
The ruling also names what can offset the loss: assets that are not impaired by the manager's departure, life insurance that covers the loss, or competent management that can be hired for the pay the former manager received.
In practice, this is the paragraph behind many a key-person discount argument. If you are the business, a buyer or the IRS can reasonably ask what happens to earnings when you leave. A written succession plan, documented customer relationships beyond you and a second manager with real authority are not just good operations. They are evidence on value.
How the weights shift
Section 5 says certain factors carry more weight depending on the company. Earnings are usually the primary consideration for a company that sells products or services to the public. For an investment or real estate holding company, adjusted net worth gets the greater weight, because the value of the stock follows the value of the assets beneath it.
That split matters for the owner of a family business that holds both an operating company and the building it sits in. The two can need two different methods.
Section 6 turns to the capitalization rate, the rate used to turn earnings or dividends into a value. The ruling calls this one of the most difficult problems in valuation and says no standard tables exist for closely held corporations. It names three considerations: the nature of the business, the risk involved, and the stability or irregularity of earnings.
Section 7 closes off a shortcut many people still try. It says that taking an average of several factors, such as book value, capitalized earnings and capitalized dividends, serves no useful purpose, and that the result cannot be supported except "by mere chance."
A worked example, with made-up numbers
Take a hypothetical regional HVAC services company owned by two partners. The numbers below are invented to show the mechanics, not a market benchmark.
- Normalized earnings: $600,000 a year after adjusting the owners' pay to a market level. Our guide to [owner pay, SDE and EBITDA add-backs](https://www.409.ai/articles/owner-compensation-add-backs-small-business-valuation-sde-ebitda) shows how that adjustment is built.
- The appraiser weights the last three years more heavily because earnings rose from $450,000 to $600,000 (factor 4).
- A capitalization rate of 25% on those earnings implies about $2.4 million for the operating business (section 6).
- The company also holds $300,000 in excess cash and an unused lot worth $200,000. The ruling's treatment of nonoperating assets (factor 3) means these are valued separately and added, not buried in the earnings multiple.
That gives an indicated value near $2.9 million before any adjustment for the size or marketability of the interest. If one partner is the licensed contractor and holds all the customer relationships, factor 2 and the "one-man" paragraph put pressure on that figure, and the appraiser has to say how much.
A different capitalization rate of 20% would produce $3.0 million for the operating business alone. That 5-point change is worth $600,000. It is why the rate, and the reasoning behind it, gets the closest reading in any report.
Where the ruling stops
Three limits are worth knowing.
First, it speaks to estate and gift tax, and the courts and the IRS use it well beyond that. A divorce court, a lender or a partner buyout may apply a different standard of value, and state law can define value differently for a dissenting owner. The ruling does not decide that for you.
Second, its section on restrictive agreements is old. Congress later added its own rules for buy-sell and similar agreements in Internal Revenue Code section 2703, and the Supreme Court's 2024 decision in Connelly changed the picture for company-owned life insurance. Read the ruling's agreement discussion as history, and see [our Connelly article](https://www.409.ai/articles/buy-sell-agreement-valuation-connelly-life-insurance) for the current landscape.
Third, it is a framework for an appraiser's judgment and is not a substitute for one. It cannot tell you your number.
What to do with this before the next event
If a gift, an estate event, a buyout or a loan is within a year, assemble what the ruling asks for before anyone is paid to ask for it:
1. Five years of profit and loss statements, plus balance sheets for the last two years and the month-end before the valuation date. 2. A schedule of assets the business does not need to operate. 3. Every sale or offer for shares in the last several years, with who the parties were and whether they were at arm's length. 4. A short written note on what happens to the business if the key owner is out for six months. 5. The owners' compensation history, side by side with what you would pay a replacement.
An appraiser who gets this on day one spends the engagement on judgment instead of document chasing, and your report has a better chance of surviving review. If you need a defensible number for one of these events, [409.AI small business valuation](https://www.409.ai/products/smb-valuation) delivers expert-reviewed reports built on this framework. For a related look at what the price of a sale does after the deal, see [how Form 8594 splits the price](https://www.409.ai/articles/form-8594-asset-allocation-small-business-sale).