Certified Valuation Analyst (CVA) Practice Exam

Which IRS pronouncement is known as the "excess earnings method"?

1. RR 68-609

2. RR 98-34

3. ARM 34

4. RR 86-70

The correct answer is: RR 68-609

The "excess earnings method" is primarily discussed in Revenue Ruling 68-609. This method is employed in business valuations, particularly in the context of determining the value of intangible assets. It focuses on isolating earnings that exceed the normal return that could be expected from the tangible assets of the business. By examining these excess earnings, the method aims to value intangible assets like goodwill, which may not be directly attributable to the company's physical assets. Revenue Ruling 68-609 provides the foundational framework for practitioners using this method in valuation contexts, especially in closely-held businesses where intangible assets can be substantial but are often difficult to quantify. As a result, this revenue ruling is significant in the realm of business valuation and tax-related assessments, solidifying its reputation as the primary authority on the excess earnings method. The other options, while relevant in their contexts—such as different IRS rulings or methodologies—do not specifically address the excess earnings method like Revenue Ruling 68-609 does.