ValuAdder Business Valuation Blog

There is no better way to lend credibility to your business appraisal than comply with established and widely recognized standards. Two such primary standards often come into play: Revenue Ruling 59-60 and the Uniform Standards of Professional Appraisal Practice (USPAP). Both of these standards are crucial in their respective domains, yet they serve different purposes and have distinct methodologies. Let’s take a closer look at how the Revenue Ruling 59-60 compares to USPAP standards.

What is the Revenue Ruling 59-60?

Revenue Ruling 59-60, published by the Internal Revenue Service (IRS) in 1959, provides guidelines for valuing closely held corporate stock for estate and gift tax purposes. This ruling outlines eight fundamental factors you should consider in the valuation process:

  • Nature and history of the business
  • Economic outlook
  • Book value and financial condition
  • Earnings capacity
  • Dividend-paying capacity
  • Goodwill and intangible value
  • Stock sales and the size of the block to be valued
  • Market price of stocks in similar businesses

These factors ensure a comprehensive assessment of a company’s value, emphasizing historical operational and financial data. Revenue Ruling 59-60 aims to establish a fair market value as a measure of the company’s worth.

Overview of the USPAP Standards

The Uniform Standards of Professional Appraisal Practice (USPAP) are a set of guidelines developed by The Appraisal Foundation to ensure ethical and professional conduct in the appraisal profession. USPAP standards apply to a wide range of valuation disciplines, including real estate, personal property, and business valuation.

USPAP standards comprise:

  • Ethics Rule to Ensure integrity, impartiality, objectivity, and independence in the appraisal process.
  • Record Keeping Rule which requires proper documentation and retention of appraisal records.
  • Competency Rule requiring appraisers to have the necessary knowledge and experience to perform the appraisal.
  • Scope of Work Rule defining the extent of research and analysis required for the appraisal.
  • Standards Rules which provide detailed guidelines for conducting various types of appraisals.

How the Two Standards Compare

Purpose and Application

Revenue Ruling 59-60 is primarily used for tax purposes, particularly in valuing closely held corporate stock for estate and gift tax.
USPAP standards apply broadly across many appraisal disciplines, including businesses and other types of assets.  This ensures uniformity and ethical conduct in all types of valuations.

Methodology

Revenue Ruling 59-60 focuses on a combination of financial metrics, market conditions, and business characteristics to determine fair market value.
USPAP emphasizes a flexible approach where the scope of work and methodology can vary depending on the specific appraisal assignment.

Compliance and Enforcement

Revenue Ruling 59-60 compliance is mandatory for tax-related valuations, and the IRS oversees its application.
USPAP standards are endorsed by professional appraisal organizations, courts, and government regulatory agencies, ensuring adherence through certification and disciplinary measures.

Ethical Considerations

While Revenue Ruling 59-60 includes principles that encourage fairness, it does not explicitly outline ethical rules.
In contrast, USPAP contains a comprehensive Ethics Rule, stating that appraisers should conduct their work with integrity and professionalism.

Flexibility

Revenue Ruling 59-60 provides a structured framework specifically for business valuation in tax related scenarios, with less flexibility in interpretation.
USPAP offers a wider scope, allowing appraisers to tailor their work based on the unique requirements of each assignment.

Tying it all together

Both Revenue Ruling 59-60 and USPAP standards are foundational in the field of valuation, each serving its distinct purpose. Revenue Ruling 59-60 provides specific guidelines for valuing closely held stock for tax purposes in a consistent and fair manner. On the other hand, USPAP standards offer you a comprehensive and flexible framework that governs the ethical and professional conduct in business appraisal.

Understanding the differences and applications of these standards is crucial for professionals in the valuation industry. The goal is to help appraisers create accurate, ethical, and reliable valuations that meet regulatory requirements and client expectations.

See Valuation Tour