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demonstrated qualifications of the expert and all other evidence
of value).
Petitioners’ expert, founder of an economic consulting
company, was credible, consistent, and highly qualified. In
determining a fair market value for the warrants, he began his
analysis with a consideration of the 7,354,092 shares of series B
stock Ciena sold in 1994 and 1995 for $1.50 per share. He then
applied prudent valuation techniques (i.e., focusing on venture
capitalist benchmark rates of return) to arrive at a fair market
value, on the date of grant, of 90 cents per share.
Accordingly, we find that there was an ascertainable fair
market value for the warrants on the date of grant, the value of
the warrants was includable in 1995, and respondent erred in
determining a deficiency when the warrants were exercised in
1997.
III. Warrants as Dividend Income to Mr. Kimberlin
Pursuant to section 61(a)(7), gross income includes
dividends. The term “dividend” is defined in section 316(a) as a
distribution of property by a corporation to its shareholders out
of its earnings and profits. There is no requirement that the
dividend be formally declared or even intended by the
corporation. Gulf Oil Corp. v. Commissioner, 89 T.C. 1010, 1028
(1987), affd. 914 F.2d 396 (3d Cir. 1990). Any portion of a
distribution which is not a dividend is applied to the adjusted
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