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In June 1980, petitioner was incorporated to conduct the
sole proprietorship label and printing business that Mr. Martin
had operated. Upon petitioner's incorporation, 450 shares of
petitioner's outstanding shares of stock were issued to Mr.
Martin and the remaining 50 shares of petitioner's outstanding
stock were issued to another individual. In January 1986, this
other individual's 50 shares were redeemed, and Mr. Martin became
petitioner's sole shareholder. Mr. Martin continued to be
petitioner's sole shareholder until 1992, when he sold all of his
shares in petitioner to Mike. During its fiscal year ended June
30, 1990, petitioner's board of directors consisted of Mr.
Martin, Mrs. Martin (Mr. Martin's wife), and Jerry Crispe (who
was then petitioner's executive vice president).
In conducting his and later petitioner's label and printing
business, Mr. Martin concentrated on selling to companies in the
electronics industry, a number of which are located in the
Pacific Northwest. Since its incorporation in 1980, all of
petitioner's products have been custom designed and produced for
particular customers. Most of petitioner's sales are to
electronics companies, like Compaq and Hewlett-Packard, who
demand high quality products from their suppliers.
Over the years, Mr. Martin has been extremely successful in
operating petitioner profitably and in expanding its business and
sales. Petitioner has enjoyed high profit margins in selling its
custom-designed products to a number of high-technology
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