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Some of the facts have been stipulated and are so found.
The stipulations and attached exhibits are incorporated herein by
this reference. Petitioner's principal office was in Hicksville,
New York, when it petitioned the Court. Petitioner filed its
Federal income tax return based on a fiscal year ending July 31,
1985, and it used the cash receipts and disbursements method.
1. Petitioner
Petitioner is a "third-tier chip broker” that locates,
purchases, and sells computer chips, electronic components, and
integrated circuits.2 Petitioner and its predecessor, Pulsar
Components, Inc. (Components), developed a niche in their field
that enabled them to take advantage of supply and demand
imbalances caused by the production capacities of microchip
manufacturers and the production needs of computer manufacturers.
Petitioner located scarce parts during periods of low supply and
high demand by using a network of brokers, surplus houses,
distributors, and manufacturers, of which it had a working
2 Computer manufacturers obtain electronic components and
microchips from three sources (tiers) of supply. The first tier,
the primary source of supply of electronic components, is a chip
manufacturer such as Intel, Micron, or Fujitsu. Approximately
90 percent of the parts purchased by equipment manufacturers are
purchased directly from chip manufacturers. The second tier,
franchise distributors such as Arrow Electronics, Hamilton-Avnet,
and Schweber, are typically large corporations that warehouse
substantial inventories of parts. Franchised distributors have
franchise agreements to represent product lines of certain
manufacturers, and they sell parts out of inventory for a set
markup that is usually 15 to 20 percent. The third tier consists
of chip brokers and traders like petitioner.
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