Kevin B. Kimberlin and Joni R. Steele, et al. - Page 15

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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                
          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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