FOREWORD

The Internal Revenue Bulletin is prepared in six parts as follows: I. Part I includes rulings and decisions which are based on the application of provisions of the Internal Revenue Code of 1954 and, unless otherwise stated in the ruling or decision, are published without consideration as to any application of the provisions of the Internal Revenue Code of 1939 or other related public laws.

II. Part II includes rulings and decisions which are based on the application of the Internal Revenue Code of 1939, the Federal Firearms Act, and other public laws except those pertaining to the various alcohol taxes; and, unless otherwise noted therein, they are published without consideration as to any application of the provisions of the Internal Revenue Code of 1954. Part II is subdivided into three subparts according to matters issued under the Internal Revenue Code of 1939 (Subpart A), the Federal Firearms Act (Subpart B), and other public laws (Subpart C).

III. Part III contains rulings and decisions pertaining to the various alcohol taxes. This part is subdivided into four subparts according to matters issued under the Internal Revenue Code of 1954 (Subpart A), the Internal Revenue Code of 1939 (Subpart B), the Federal Alcohol Administration Act (Subpart C), and other public laws (Subpart D).

IV. Part IV contains treaties and tax legislation, including related committee and Conference Reports. This part is subdivided into three subparts according to tax conventions, Treasury Decisions and Revenue Rulings issued with respect thereto (Subpart A), legislation (Subpart B), and Committee Reports (Subpart C). House, Senate and Conference Committee Reports printed in the Bulletin do not include the portion entitled Changes in Existing Law."

V. Part V is devoted to administrative, procedural and miscellaneous matters.

VI. Part VI includes general announcements which are deemed to be of interest to the general public. With the exception of the disbarment list included in this part, none of the other announcements will be consolidated in the Cumulative Bulletin.

The Highlights of this Bulletin include a reference to each item published in the Bulletin. Because these are grouped according to the type of tax involved, the Highlights for a particular issue serve as an index to matters published therein. The Bulletin service carries a cumulative index on a monthly basis. That index appears in the first Bulletin for each month and indexes matters published during the preceding month. These monthly indexes are cumulated on a quarterly and semiannual basis, and the indexes so cumulated are published in the first Bulletin of the succeeding quarterly period, respectively.

ANNOUNCEMENT RELATING TO PROPOSED REGULATIONS PUBLISHED WITH NOTICE OF PROPOSED RULEMAKING

Under the Administrative Procedure Act, changes in regulations are (with certain exceptions described in such act) published in the Federal Register in tentative or proposed form to provide interested parties with an opportunity to file their objections or suggestions for consideration prior to final adoption of such regulations. The Internal Revenue Service will announce in the Internal Revenue Bulle. tin the issuance of tentative or proposed regulations relating to internal revenue matters which have been published in the Federal Register with notice of proposed rulemaking. These announcements will appear in the Bulletin during the period which has been prescribed for the submission and consideration of any views, arguments, or suggestions pertaining to the proposed regulations so published. Statement of such views, arguments or suggestions should be submitted in writing in duplicate to the Commissioner of Internal Revenue, Washington, D.C.

RULINGS AND DECISIONS UNDER THE INTERNAL REVENUE CODE OF 1954

Rulings and decisions published in Part I of the Internal Revenue Bulletin are based on the application of provisions of the Internal Revenue Code of 1954 and, unless otherwise stated in the rulings or decisions, are published without consideration as to any application of the provisions of the Internal Revenue Code of 1939 or related public laws.

SECTION 461.-GENERAL RULE FOR TAXABLE YEAR OF DEDUCTION

26 CFR 1.461-1: General rule for taxable year of deduction.

Rev. Rul. 59-59

Where, prior to May 1, 1957, in the case of a taxpayer, computing taxable income under an accrual method of accounting, an audit of the taxpayer's return results in an increased allowance of the deduction for State taxes in the year to which such taxes relate rather than the year in which properly accrued, the Internal Revenue Service will take no affirmative action to reopen such returns.

Revenue Ruling 57-105, C.B. 1957-1, 193, clarified.

Advice has been requested concerning clarification of Revenue Ruling 57-105, C.B. 1957-1, 193, regarding the treatment for Federal income tax purposes of increases of State taxes resulting in adjustments of Federal income tax returns filed by taxpayers, computing taxable income under an accrual method of accounting.

Revenue Ruling 57-105, holds that in the case of an accrual method taxpayer, an increase in the amount of the State tax accrues and is allowed as a deduction for Federal income tax purposes when the amount is finally determined by litigation or default, or when the taxpayer acknowledges his liability to the State for the amount of such increase. However, cases closed by audits prior to May 1, 1957, are not to be reopened by the Internal Revenue Service merely to apply this ruling.

In order to clarify this ruling and to remove any ambiguity that may exist as well as to insure a uniform application of the Revenue Ruling, the last paragraph thereof is hereby deleted and the following paragraph substituted therefor:

Where, prior to May 1, 1957, audit has been made of a taxpayer's return and, as a result, there has been an allowance in the deduction for increased State taxes in the year to which such taxes related rather than the year in which they properly accrued under this Revenue Ruling, the Internal Revenue Service will take no affirmative action to reopen such returns. However, should

the taxpayer, in returns filed after completion of the audit, claim the benefits of this Revenue Ruling and seek to deduct in the later years the additional taxes previously allowed as a deduction, the Service will, insofar as permitted by the Code, assert deficiencies for the earlier years to the extent that the taxpayer's liability for the earlier years was reduced by the prior allowance.

SECTION 2031.-DEFINITION OF GROSS ESTATE

26 CFR 20.2031-2: Valuation of stocks and

bonds.

(Also Section 2512; Part II, Sections 811 (k), 1005, Regulations 105, Section 81.10.)

Rev. Rul. 59-60

In valuing the stock of closely held corporations, or the stock of corporations where market quotations are not available, all other available financial data, as well as all relevant factors affecting the fair market value must be considered for estate tax and gift tax purposes. No general formula may be given that is applicable to the many different valuation situations arising in the valuation of such stock. However, the general approach, methods, and factors which must be considered in valuing such securities are outlined. Revenue Ruling 54-77, C.B. 1954-1, 187, superseded.

SECTION 1. PURPOSE.

The purpose of this Revenue Ruling is to outline and review in general the approach, methods and factors to be considered in valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes. The methods discussed herein will apply likewise to the valuation of corporate stocks on which market quotations are either unavailable or are of such scarcity that they do not reflect the fair market value.

SEC. 2. BACKGROUND AND DEFINITIONS.

.01 All valuations must be made in accordance with the applicable provisions of the Internal Revenue Code of 1954 and the Federal Estate Tax and Gift Tax Regulations. Sections 2031(a), 2032 and 2512(a) of the 1954 Code (sections 811 and 1005 of the 1939 Code) require that the property to be included in the gross estate, or made the subject of a gift, shall be taxed on the basis of the value of the property at the time of death of the decedent, the alternate date if so elected, or the date of gift.

.02 Section 20.2031-1(b) of the Estate Tax Regulations (section 81.10 of the Estate Tax Regulations 105) and section 25.2512-1 of the Gift Tax Regulations (section 86.19 of Gift Tax Regulations 108) define fair market value, in effect, as the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.

.03 Closely held corporations are those corporations the shares of which are owned by a relatively limited number of stockholders. Often the entire stock issue is held by one family. The result of this

situation is that little, if any, trading in the shares takes place. There is, therefore, no established market for the stock and such sales as occur at irregular intervals seldom reflect all of the elements of a representative transaction as defined by the term "fair market value." SEC. 3. APPROACH TO VALUATION.

01. A determination of fair market value, being a question of fact, will depend upon the circumstances in each case. No formula can be devised that will be generally applicable to the multitude of different valuation issues arising in estate and gift tax cases. Often, an appraiser will find wide differences of opinion as to the fair market value of a particular stock. In resolving such differences, he should maintain a reasonable attitude in recognition of the fact that valuation is not an exact science. A sound valuation will be based upon all the relevant facts, but the elements of common sense, informed judgment and reasonableness must enter into the process of weighing those facts and determining their aggregate significance.

.02 The fair market value of specific shares of stock will vary as general economic conditions change from "normal" to "boom" or depression," that is, according to the degree of optimism or pessimism with which the investing public regards the future at the required date of appraisal. Uncertainty as to the stability or continuity of the future income from a property decreases its value by increasing the risk of loss of earnings and value in the future. The value of shares of stock of a company with very uncertain future prospects is highly speculative. The appraiser must exercise his judgment as to the degree of risk attaching to the business of the corporation which issued the stock, but that judgment must be related to all of the other factors affecting value.

.03 Valuation of securities is, in essence, a prophesy as to the future and must be based on facts available at the required date of appraisal. As a generalization, the prices of stocks which are traded in volume in a free and active market by informed persons best reflect the consensus of the investing public as to what the future holds for the corporations and industries represented. When a stock is closely held, is traded infrequently, or is traded in an erratic market, some other measure of value must be used. In many instances, the next best measure may be found in the prices at which the stocks of companies engaged in the same or a similar line of business are selling in a free and open market. SEC. 4. FACTORS TO CONSIDER.

.01 It is advisable to emphasize that in the valuation of the stock of closely held corporations or the stock of corporations where market quotations are either lacking or too scarce to be recognized, all available financial data, as well as all relevant factors affecting the fair market value, should be considered. The following factors, although not all-inclusive are fundamental and require careful analysis in each

case:

(a) The nature of the business and the history of the enterprise from its inception.

(b) The economic outlook in general and the condition and outlook of the specific industry in particular.

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