9027 / How are shares of stock valued in a closely-held corporation?
IRC Section 2031(b) governs valuation, for estate tax purposes, of unlisted stocks and securities. Essentially, this provision provides that the value of securities of corporations involved in the same or similar business may be considered in cases where the small business at issue has no readily available market price because its interests are neither listed on a public exchange nor frequently traded.
Revenue Ruling 59-60 contains a broad discussion of factors that the IRS believes should be considered in valuing shares of stock in closely-held corporations or in corporations where market quotations are either lacking or too scarce to be recognized.1 The IRS has found that in these cases, all available financial data, as well as all relevant factors affecting the fair market value, should be considered. The following nonexhaustive list of factors are important in this analysis:
(1) The nature of the business and the history of the enterprise from its inception;
(2) The economic outlook in general and the condition and outlook of the specific industry in particular (see Q 9032);
(3) The book value of the stock and the financial condition of the business;
(4) The business’ earning capacity;
(5) The business’ dividend-paying capacity;
(6) Any goodwill or other intangible value that can be attributed to the business (see Q 9030 and Q 9031);
(7) Sales of the stock and the size of the block of stock to be valued (see Q 9034); and
(8) The market price of stock of corporations engaged in the same or a similar line of business having their stock actively traded in a free and open market, either on an exchange or over-the-counter (see Q 9028).2
In general, when valuing an operating company that sells goods and services, primary consideration is given to earnings, and when valuing a company that merely holds investments, primary consideration is given to asset values. However, if a company is not easily characterized as one or the other, both earnings and assets must be considered.3 For a discussion of the impact of a buy-sell agreement on valuation, see Q 8568.