Page 20 - Business Valuation for Estates & Gift Taxes

IRS Revenue Ruling 68-609

Revenue Ruling 68-609 supersedes Appeals and Review Memorandum (A.R.M.) 34, A.R.M. 68, O.D.
937, and Revenue Ruling 65-192. Revenue Ruling 68-609 also updates and restates the currently out-
standing portions of A.R.M. 34, A.R.M. 68, and O.D. 937. According to Revenue Ruling 68-609, the
"formula" approach may be used in determining the fair market value of intangible assets of a business
only if there is no better basis available for determining their value.

IRS Revenue Ruling 77-287

Revenue Ruling 77-287 amended Revenue Ruling 59-60 and provides guidance for the valuation, for
federal tax purposes "of securities that cannot be immediately resold because they are restricted from re-
sale pursuant to federal securities laws." fn 12 These restrictions reduce the marketability of the securities
and therefore the securities may need to be discounted accordingly. All relevant facts and circumstances
that impact the value of the restricted stock, such as the documents or agreements relating to the re-
strictions and other factors discussed in Section 4 of Revenue Ruling 59-60, must be taken into account
when arriving at the restricted stock’s fair market value.

IRS Revenue Ruling 80-213

This revenue ruling also amended Revenue Ruling 59-60 by providing information and guidance to
those concerned with the valuation of a subsidiary corporation’s stock that is distributed to the share-
holders of a former parent corporation when the shares of both the parent and subsidiary can only be
transferred as a unit. Revenue Ruling 80-213 lists factors, in addition to those mentioned in Revenue
Ruling 59-60, which should be considered in valuing such "stapled" stock.

IRS Revenue Ruling 83-120

This revenue ruling further amended Revenue Ruling 59-60 by specifying additional factors to be con-
sidered in valuing the common and preferred stock of a closely held corporation for gift tax and other
purposes in a recapitalization of a closely held business. Revenue Ruling 83-120 (4) (01) states that "in
general, the most important factors to be considered in determining the value of preferred stock are its
yield, dividend coverage, and protection of its liquidation preference." fn 13 Other factors must also be
considered, such as the ability of the issuing company to pay the full liquidation preference at liquida-
tion, if the preferred stock has voting rights or redemptive privileges, and whether or not there are unu-
sual covenants or provisions of the preferred stock that may affect the stock’s marketability. Section (5)
(01) of Revenue Ruling 83-120 states that if the preferred stock has a fixed dividend rate and is non-
participating, "common stock has the exclusive right to the benefits of future appreciation of the value of
the corporation." fn 14 The value of that benefit depends on the company’s historical growth trends, gen-
eral economic conditions, and the conditions of the company’s specific industry.

IRS Revenue Ruling 93-12

fn 12
IRS Revenue Ruling 77-287.
fn 13 IRS Revenue Ruling 83-120(4)(01).

fn 14
IRS Revenue Ruling 83-120(5)(01).

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