Written by: Andrew Cohen, CFA, CPA, Managing Partner, Condesa Financial Group

Key Takeaways

• A business valuation for tax purposes must follow IRS guidance under Rev. Rul. 59-60 and IRM 4.48.4, use a credentialed appraiser, and include contemporaneous documentation to avoid 20%–40% accuracy-related penalties.
• Fair market value relies on the willing-buyer and willing-seller standard, so reports must document both perspectives and apply DLOC and DLOM multiplicatively.
• Revenue Ruling 59-60 requires every tax-purpose valuation to address eight factors: business nature, economic outlook, financial condition, earning capacity, dividends, goodwill, prior sales, and market comparables.
• Qualified appraisals must comply with USPAP, be signed by an independent appraiser with ASA, ABV, CVA, CBA, or MRICS credentials, and be attached to the relevant tax return (Form 709, 706, or 8283) to start the statute of limitations.
• Condesa Financial’s ex-Big 4 team helps SME owners prepare IRS-compliant valuation files, so you can schedule a free consultation today.

IRS Valuation Rules You Must Follow

The foundational IRS authority for business valuation is Revenue Ruling 59-60, supplemented by IRM 4.48.4. Together, these sources describe what the IRS expects when a non-publicly traded business interest appears on a federal return.

Practitioners typically follow this sequence to satisfy IRS guidelines:

1. Confirm the valuation date, the standard of value (fair market value), and the premise of value (going concern or liquidation).
2. Engage a credentialed appraiser holding ASA, ABV, CVA, CBA, or MRICS who performs compensated appraisal work regularly.
3. Apply at least two of the three recognized approaches: Income, Market, and Asset-Based.
4. Document the rationale for weighting or excluding any approach in clear narrative language.
5. Address all eight Revenue Ruling 59-60 factors explicitly in the report narrative.
6. Apply DLOC and DLOM multiplicatively when valuing a minority interest, and fully document each discount before finalizing the report.
7. Attach the completed report, including discount workpapers, to the relevant return (Form 709, 706, or 8283) to satisfy adequate disclosure requirements.

Case example: In Rock Cliff Reserve, LLC v. Commissioner (T.C. Memo. 2025-73), the Tax Court disallowed over $62 million in conservation easement deductions because the taxpayers lacked qualified appraisals.

Schedule a free consultation to confirm your valuation file meets current IRS guidelines.

Applying the Fair Market Value Standard

Fair market value (FMV) in Revenue Ruling 59-60 means the price at which property changes hands between a willing buyer and a willing seller, neither under compulsion, both with reasonable knowledge of relevant facts. This standard governs estate, gift, charitable contribution, and restructuring tax events.

Applying the willing-buyer and willing-seller standard involves several concrete steps:

1. Identify the specific ownership interest being transferred, including whether it is controlling or minority and the exact percentage stake.
2. Determine whether the interest carries full control rights, limited governance rights, or restricted transferability.
3. Select comparable public companies or transactions that a hypothetical buyer would review.
4. Adjust the indicated value for entity-level discounts such as DLOC and DLOM that reflect the interest’s actual marketability.
5. Document that the concluded value reflects both the buyer’s and seller’s hypothetical perspectives, because courts have rejected DLOM conclusions that considered only the buyer’s viewpoint, as in Mandelbaum v. Commissioner (T.C. Memo 1995-255).

Discuss your ownership structure with Condesa Financial Group’s ex-Big 4 team to ensure proper FMV standard application.

How to Use the Revenue Ruling 59-60 Factors

Revenue Ruling 59-60 prescribes eight factors that every appraiser must address when valuing closely held stock or equity interests for estate and gift tax purposes. These factors form the backbone of an IRS-defensible valuation narrative.

1. The nature and history of the business
2. General economic outlook and industry condition
3. Book value and financial condition
4. Earning capacity
5. Dividend-paying capacity
6. Goodwill or other intangible value
7. Prior sales of stock and block size
8. Market prices of comparable publicly traded companies

Appraisers typically apply these factors in a structured sequence that keeps the analysis clear and traceable:

1. Gather five years of financial statements, tax returns, and operating results.
2. Normalize earnings for owner compensation, nonrecurring items, and related-party transactions.
3. Assess industry outlook using published industry data and economic indicators current as of the valuation date.
4. Identify and quantify goodwill and intangible assets separately from tangible book value.
5. Select guideline public companies and recent M&A transactions for the market approach.
6. Weight the approaches based on the company’s stage, asset intensity, and earnings predictability.
7. Document each factor explicitly in the report narrative, because courts in Estate of Giustina v. Commissioner (2014) scrutinized method weighting when it did not align with economic evidence.

Real-world application: Condesa Financial Group built financial models for Ecuador’s largest real estate developer across two projects. The models addressed earning capacity, asset values, and market comparables with enough rigor that the developer closed a $20M raise and an $80M raise on separate projects. The same analytical discipline that supports investor confidence also supports IRS-defensible valuations.

Get a Rev. Rul. 59-60 compliant valuation from Condesa’s team covering all eight required factors.

Documenting DLOC and DLOM for Tax Valuations

Having established the Revenue Ruling 59-60 framework, the next step involves handling marketability and control discounts correctly. The multiplicative formula for combining DLOC and DLOM is: Combined Discount = 1 − [(1 − DLOC) × (1 − DLOM)]. A 20% DLOC followed by a 30% DLOM produces a 44% combined discount, not 50%. The order of application does not change the result, but the discounts must never be added.

The IRS Discount for Lack of Marketability Job Aid (September 25, 2009) catalogs three families of DLOM methods that appraisers triangulate:

• Restricted stock studies, which provide empirical data on DLOM based on observed market discounts for restricted shares.
• Pre-IPO studies, which analyze discounts based on pre-initial public offering transactions.
• Option-pricing models, such as the Finnerty average-strike Asian put model, which produces DLOM values that vary with volatility and time to liquidity, typically between 12% and 38% in 409A valuations. The Ghaidarov geometric model is another option-pricing method used to estimate DLOM, so model selection directly affects the concluded discount.

In tax-purpose valuations, DLOC and DLOM depend on specific facts and circumstances, although DLOM discounts above 40% draw closer IRS scrutiny. Condesa’s nearshore team, staffed with ex-Big 4 professionals, sources volatility inputs from specific listed guideline companies, documents the expected holding period, and reconciles restricted stock, pre-IPO, and option-model conclusions before selecting a final DLOM. That level of documentation aligns with the IRS Job Aid’s description of best practice.

Review your discount analysis with Condesa to confirm it meets IRS Job Aid documentation standards.