Joseph M. and Marjorie Sita - Page 6




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          for the Southern District of Florida.  The matter was                       
          transferred to the U.S. Bankruptcy Court for the District of                
          Oregon on September 17, 2001.  On March 12, 2002, petitioners               
          each filed a proof of claim with the bankruptcy court for a total           
          of $39,492.3  Petitioner did not receive any money from Alpha               
          Telcom or ATC or the pay phones they purchased.                             
          C.   Claimed Deductions and Credits                                         
               On April 12, 2002, petitioners jointly filed a Form 1040,              
          U.S. Individual Income Tax Return, for 2001, to which they                  
          attached a Schedule C, Profit or Loss From Business, claiming a             
          depreciation deduction of $2,143 with respect to the seven pay              
          phones.  Petitioners also attached to the 2001 return a Form                
          8826, Disabled Access Credit, claiming a $5,000 tax credit with             
          respect to the seven pay phones.                                            
               On April 12, 2003, petitioners filed a joint Form 1040 for             
          2002, to which they attached a Schedule C claiming an expense               
          deduction of $14,000 on line 27 as an “Other” expense.  In the              


               3 The bankruptcy matter was dismissed on Sept. 10, 2003, by            
          motion of Alpha Telcom.  The bankruptcy court held that it was in           
          the best interest of creditors and the estate to dismiss the                
          bankruptcy matter so that proceedings could continue in Federal             
          District Court, where there was a pending receivership involving            
          debtors.                                                                    
               The Securities and Exchange Commission (SEC) brought a civil           
          suit against Alpha Telcom in 2001 in the U.S. District Court for            
          the District of Oregon.  On Feb. 7, 2002, the District Court held           
          that the pay phone scheme was actually a security investment, and           
          Alpha Telcom had violated Federal law because it did not register           
          the program with the SEC.  SEC v. Alpha Telcom, Inc., 187 F.                
          Supp. 2d 1250 (D. Or. 2002), affd. 350 F.3d 1084 (9th Cir. 2003).           





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