                        T.C. Memo. 1997-518



                      UNITED STATES TAX COURT



    WOMEN OF THE MOTION PICTURE INDUSTRY, ET AL.,1 Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 11227-96, 11581-96,       Filed November 17, 1997.
                  11918-96, 11919-96,
                  11921-96.



      Ronald E. Ingalls, for petitioners.

      Christina D. Moss, for respondent.

              MEMORANDUM FINDINGS OF FACT AND OPINION

           GOLDBERG, Special Trial Judge:     This case was heard

pursuant to section 7443A(b)(3) and Rules 180, 181, and 182.2


1
     Cases of the following petitioners are consolidated herewith
for purposes of trial, briefing and opinion: Family Service of
El Paso, Inc., docket No. 11581-96; Schoenstatt, Inc., docket No.
11918-96; Amarillo Council on Alcoholism and Drug Abuse, docket
No. 11919-96; and Waldorf School Association of Texas, Inc.,
docket No. 11921-96.
2
     Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
                                                   (continued...)
                               2

Respondent determined deficiencies in Federal income taxes as

follows:

Women of the Motion Picture Industry (WMPI):

     Tax Year Ending               Deficiency
     June 30, 1990                 $2,435.00

Family Service of El Paso, Inc. (FSEP):

     Tax Year Ending               Deficiency
     Dec. 31, 1989                 $1,471.00
     Dec. 31, 1990                  2,166.00

Schoenstatt, Inc. (Schoenstatt):

     Tax Year Ending               Deficiency
     Sept. 30, 1988                $ 564.00
     Sept. 30, 1989                 2,092.00
     Sept. 30, 1990                 1,993.00
     Sept. 30, 1991                 2,168.00

Amarillo Council on Alcoholism and Drug Abuse (ACADA):

     Tax Year Ending               Deficiency
     Dec. 31, 1989                 $2,707.00

Waldorf School Association of Texas, Inc. (WSA):

     Tax Year   Ending             Deficiency
     Dec. 31,   1987               $ 735.00
     Dec. 31,   1988                4,017.00
     Dec. 31,   1989                5,208.00

     After concessions set forth infra, the issues for decision

are whether (1) petitioners FSEP, Schoenstatt, ACADA, and WSA are

entitled to business expense deductions from unrelated business

taxable income (UBTI) for amounts allegedly expended for

charitable purposes in excess of amounts conceded by respondent,




2
 (...continued)
Procedure.
                                  3

and (2) whether petitioners' charitable expenditures are fully

deductible as business expenses under section 512.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated by this reference.       Each of the petitioners

conducted its principal activities in the State of Texas at the

time its petition was filed.

     WMPI is an unincorporated association recognized by the

Internal Revenue Service (IRS) as exempt from taxation under

section 501(c)(6).   FSEP, Schoenstatt, ACADA, and WSA are non-

profit corporations incorporated under the laws of the State of

Texas and are recognized by the IRS as exempt from taxation under

section 501(c)(3).   Each of the petitioners was recognized as

exempt during the years in issue.

     During the years in issue, petitioners were licensed by the

State of Texas to conduct bingo activities.       Thus, each was

authorized to conduct bingo and "instant bingo" under the Bingo

Enabling Act (the Act), Tex. Rev. Civ. Stat. Ann. art. 179d (West

1987 & Supp. 1990), and each was in compliance with the Act.

Until 1990, the Texas Comptroller of Public Accounts was

responsible for the regulation of bingo.       As of January 1, 1990,

the regulation of bingo was transferred to the Texas Alcoholic

Beverage Commission.
                                4

     "Instant bingo" is a game of chance.   A participant places a

wager by purchasing a card, the front of which is preprinted with

bingo card patterns and is covered with pull-tabs.   The

participant removes the pull-tabs, and if the patterns revealed

on the front of the card match the winning patterns preprinted on

the back of the card, a prize is payable.   A winning participant

collects the prize from a cashier or an usher.

     Petitioners each leased premises for the purpose of

conducting bingo and "instant bingo" (sometimes referred

collectively as bingo activities) and carried on these bingo

activities approximately 3 times per week during the years in

issue.   Petitioners' bingo activities were not substantially

related to their exempt functions or purposes.

     Each petitioner maintained a separate checking account

(referred to as the bingo account) into which the gross proceeds

less prizes paid from bingo activities were deposited.     During

the years in issue, petitioners made payments to outside

charities from bingo proceeds held in each organization's bingo

account.   In addition, FSEP, Schoenstatt, ACADA, and WSA

transferred bingo proceeds from their respective bingo accounts

into their respective general operating bank accounts (referred

to as general accounts or general funds) for their organizations

during the years in issue.   Some of these proceeds were paid to

third parties during the taxable years in issue.   During the
                                 5

taxable years 1989 and 1990, FSEP transferred bingo proceeds from

its bingo account to a savings account.

     Each licensed organization had to disburse a minimum amount

of its bingo proceeds for charitable purposes on a quarterly

basis.   The agency responsible for regulating bingo calculated

the quarterly minimum for licensed organizations and notified the

organizations of the amount required to be disbursed.

     The parties have stipulated the amount of gross receipts

received from petitioners’ bingo and "instant bingo" activities.

The parties also have stipulated the amount of expenses and

distributed proceeds attributable to petitioners' "instant bingo"

activities based upon the proportion of gross receipts generated

by "instant bingo" to the total gross receipts received from

petitioners' bingo activities.   The gross receipts and expenses

attributable to petitioners "instant bingo" activities are set

forth in Appendix A and incorporated in these findings of facts.

In addition to proceeds from bingo and "instant bingo", WSA

received amounts from dauber3 sales as set forth in Appendix A.

     Petitioners' distributions from their bingo accounts and the

minimum charitable distribution requirements under Texas law for

each petitioner are set forth in Appendix B and incorporated in

these findings of facts.   In addition to the amounts set forth in

Appendix B, in 1989 WSA made payments totaling $1,237.60 from its

general account to Kirsten Sotebier for her work as a bookkeeper.


3
     A dauber is an inking device used to mark bingo cards.
                                6

     Petitioners filed Forms 990, Returns of Organization Exempt

from Income Tax, for the years in issue.   ACADA and WSA reported

using the cash receipts and disbursements method of accounting,

and FSEP reported using the accrual method of accounting.   On

Form 990 filed for the tax year 1989, WSA reported proceeds from

dauber sales in the amount of $29,449.11 and from cafeteria sales

in the amount of $6,193.99, in addition to proceeds from bingo

games.

     Petitioners did not file Forms 990T, Exempt Organization

Business Income Tax Returns, during the years in issue.   In the

notices of deficiencies, respondent determined that petitioners

were liable for tax on UBTI with respect to petitioners' "instant

bingo" activities.   Respondent allowed deductions for prizes paid

and expenses paid related to petitioners' "instant bingo"

activities in computing petitioners' UBTI.   Respondent did not

allow any deductions for amounts expended or contributed by

petitioners for charitable purposes.

     The parties agree that the receipts generated by

petitioners' "instant bingo" activities constitute UBTI under

section 511(a).   See Julius M. Israel Lodge of B'nai B'rith No.

2113 v. Commissioner, T.C. Memo. 1995-439, affd. 98 F.3d 190 (5th

Cir. 1996).   Respondent concedes that petitioners are entitled to

deductions under sections 162(a) and 512(a) in computing their
                                  7

UBTI for amounts paid to outside charities or expended for

charitable purposes as follows:

WMPI:4

    Tax Year Ended         Deduction
    June 30, 1990           $5,965

FSEP:

    Tax Year Ended         Deduction
    Dec. 31, 1989           $1,045
    Dec. 31, 1990            5,959

Schoenstatt:

    Tax Year Ended         Deduction
    Sept. 30, 1990           $387
    Sept. 30, 1991            755

ACADA:

    Tax Year Ended         Deduction
    Dec. 31, 1989           $5,028

WSA:

    Tax Year   Ended       Deduction
    Dec. 31,   1987         $ 2,462
    Dec. 31,   1988           7,373
    Dec. 31,   1989          13,855

The amounts conceded by respondent include payments made directly

to outside charities and amounts paid from petitioner's general

funds which the parties agree are attributable to "instant bingo"

proceeds.   Respondent also concedes that WSA is entitled to

deductions against UBTI under sections 170 and 512(b)(10) in the



4
     The parties have stipulated all amounts necessary to compute
WMPI's UBTI for the year ended June 30, 1990. No issue remains
with respect to WMPI.
                                  8

amounts of $343, $2,014, and $2,186 for the tax years 1987, 1988,

and 1989, respectively.

                                OPINION

     Respondent's determinations are presumed correct, and

petitioners have the burden of proving them erroneous.     Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).      Further,

deductions are a matter of legislative grace, and petitioners

must prove entitlement to any deductions claimed.      INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992).      Taxpayers must maintain

adequate records to substantiate the amount of any deductions

claimed.   Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

     Under section 512(a), each petitioner's UBTI from its

"instant bingo" activity is computed as the gross income derived

therefrom, less the deductions allowed by Chapter 1 which are

directly connected with carrying on this activity, subject to the

modifications contained in section 512(b).     As relevant here,

section 512(b) provides that any deduction allowed under section

170 shall be allowed in computing UBTI, but such deduction is

limited to 10 percent of UBTI computed without regard to such

deduction.   Sec. 512(b)(10).

     Section 162 allows a deduction for all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.      Section 170 allows a deduction

for any charitable contribution or gift, as defined therein, paid
                                  9

in the taxable year.   In order to be fully deductible under

section 512(a), petitioners' claimed items of deduction must

qualify for deduction as business expenses under section 162

rather than as charitable contributions under section 170, South

End Italian Independent Club, Inc. v. Commissioner, 87 T.C. 168,

175 (1986), and must have a proximate and primary relationship to

the carrying on of petitioners' "instant bingo" activities, sec.

1.512(a)-1(a), Income Tax Regs.

     The State of Texas authorizes qualified organizations to

conduct bingo and "instant bingo" games.    Under Texas law, net

proceeds from bingo activities must be devoted to "charitable

purposes".   Tex. Rev. Civ. Stat. Ann. art. 179d, sec. 11(d) (West

1987 & Supp. 1990).5   Under the Act and the rules and regulations

promulgated thereunder, by the end of each quarter an

organization must disburse an amount equal to 35 percent of the

adjusted gross receipts from the last preceding quarter, less a

certain amount of authorized expenses.6    Renewal of a license may


5
     Sec. 11(d) of the Bingo Enabling Act, as effective for the
years 1987 through 1989, provided in part: "The net proceeds of
any game of bingo * * * shall be exclusively devoted to the
charitable purposes of the organization permitted to conduct the
game." Tex. Rev. Stat. Ann. art. 179(d), sec. 11(d) (West 1987).
In 1990, the sec. was amended to provide in part: "The net
proceeds of any game of bingo * * * shall be exclusively devoted
to charitable purposes." Tex. Rev. Stat. Ann. art. 179(d), sec.
11(d) (West Supp. 1990).
6
     In 1987, the bingo rules required: "By the end of each
quarter, each licensed authorized organization shall disburse for
charitable purposes an amount not less than 35 percent of the
                                                   (continued...)
                               10

be denied if an organization fails to dispose of proceeds in

accordance with the provisions of the Act.   Tex. Rev. Civ. Stat.


6
 (...continued)
organization's adjusted gross receipts from the last preceding
quarter." Tex. Admin. Code tit. 34, sec. 3.556 (1987). The term
"adjusted gross receipts" was defined as gross receipts less the
amount of prizes awarded. Id. Effective Jan. 1, 1988, the Rules
were amended. Sec. 3.556 of the Tex. Admin. Code provided:
          (a) For the purposes of this section, the term
     "adjusted gross receipts" means gross receipts less the
     amount awarded as prizes.
          (b) By the end of each quarter, each licensed
     authorized organization shall disburse for charitable
     purposes, an amount not less than 35 percent of the
     organization's adjusted gross receipts from the last
     preceding quarter, less the credits allowed under subsection
     (c) of this section.
          (c) The amount paid as bingo taxes for the last
     preceding quarter and an amount for basic fixed expenses
     equal to 2.75 percent of the gross receipts for the last
     preceding quarter shall be allowed as a credit towards the
     required 35 percent charitable distribution.
     Effective Aug. 21, 1988, sec. 3.556 was repealed, and sec.
3.555 was adopted containing similar terms. In 1990 this
requirement was codified.
     As effective Jan. 1, 1990, the Act requires that:
     Before the end of each quarter, each licensed authorized
     organization shall disburse for charitable purposes an
     amount not less than 35 percent of the organization's
     adjusted gross receipts from the last preceding quarter,
     less the amount of any credits allowed by rule for bingo
     gross receipts, taxes, and authorized expenses. For
     purposes of this subsection, adjusted gross receipts means
     gross receipts plus any consideration received from the
     rental of premises for bingo by the authorized organization,
     less the amount of prizes paid in the preceding quarter. If
     a licensed authorized organization fails to meet the
     requirements of this subsection for a quarter, the
     commission in applying appropriate sanctions may consider
     whether, taking into account the amount required to be
     distributed during that quarter and the three preceding
     quarters and the charitable distributions for each of those
     quarters, the organization has distributed a total amount
     sufficient to have met the 35 percent requirement for that
     quarter and the three preceding quarters combined.
Tex. Rev. Civ. Stat. Ann. art. 179d, sec. 19a(k) (West 1990).
                                 11

Ann. art. 179d, sec. 13(c)(4) (West 1987 & Supp. 1990).   A

license may be suspended or revoked for failure to comply with

the Act.   Tex. Rev. Civ. Stat. Ann. art. 179d, sec. 16(b) & (e)

(West Supp. 1990).

     The term "charitable purposes" is defined in the Act as one

or more causes, deeds, or activities that (1) benefit the needy

of Texas by, among other things, promoting their opportunity for

religious or educational advancement, relieving disease or

suffering, or by contributing to their physical well-being; or

(2) initiate, perform or foster public works in Texas.    Tex. Rev.

Civ. Stat. Ann. art. 179d, sec. 2(9) (West 1987 & Supp. 1990).

In addition, the term "charitable purposes" is defined to include

organizational and administrative activities that assist the

licensed authorized organization in furthering those charitable

purposes listed in section 2(9) of the Act provided that the

activity relates to a purpose which is consistent with the stated

purposes of the organization.7   Tex. Admin. Code tit. 34, sec.

3.544 (1987, 1988, 1989 & 1990).

     Under the Act, a licensed organization is required to

establish and maintain one regular checking account designated

the "bingo account".   Tex. Rev. Civ. Stat. Ann. art. 179d, sec.


7
     Expenditures for services rendered and materials purchased
for the conduct of bingo by the organization are not considered
distributions for charitable purposes. Tex. Admin. Code tit. 34,
sec. 3.544 (1987); Tex. Admin. Code tit. 34, sec. 3.544 (1988);
Tex. Admin. Code tit. 34, sec. 3.544 (1989); Tex. Admin. Code
tit. 34, sec. 3.544 (1990).
                                12

19a(a) (West 1987 & Supp. 1990).     The Act requires that "All

funds derived from the conduct of bingo, less the amount awarded

as cash prizes, shall be deposited in the bingo account.      No

other funds may be deposited in the bingo account."8    Id.   Checks

may be drawn on the bingo account for the payment of: necessary

expenses and compensation incurred and paid in connection with

the conduct of bingo; "the disbursement of net proceeds derived

from the conduct of bingo to charitable purposes"; and the

transfer of net proceeds derived from the conduct of bingo to a

designated bingo savings account pending a disbursement to a

charitable purpose.   Tex. Rev. Civ. Stat. Ann. art. 179d, sec.

19a(c) (West 1987 & Supp. 1990).     The transfer of gross receipts

derived from the conduct of bingo to another account maintained

by an organization is not permitted except as provided in section

19a(c).   Tex. Rev. Civ. Stat. Ann. art. 179d, sec. 19a(f), (g)

(West 1987 & Supp. 1990).   Gross receipts derived from the

conduct of bingo may not otherwise be commingled with other funds

of the licensed organization.   Id.

FSEP, Schoenstatt, ACADA, and WSA - Substantiation

     Although we do not believe the matter to be free from doubt,

petitioners and respondent agree that the transfer of bingo

proceeds from an organization's bingo account to its general fund


8
     In 1990, this section was amended to provide that with prior
approval, a licensed organization may lend funds from its general
fund to its bingo account. Tex. Rev. Civ. Stat. Ann. art. 179d,
sec. 19a(a) (West 1990).
                                13

is a charitable disbursement under Texas law.   Based on this

proposition, FSEP, Schoenstatt, ACADA, and WSA argue that they

are entitled to deductions for all the proceeds from their

"instant bingo" activities transferred to their general accounts.

Petitioners argue that such transfers are not distinguishable

from payments to outside charities.   Petitioners assert that each

organization's general funds were used only for exempt purposes.

Petitioners argue that these amounts are deductible as business

expenses pursuant to sections 162(a) and 512(a).

     Respondent counters that in order to be entitled to

deductions under sections 162(a) and 512(a), petitioners must

establish that any amounts claimed were actually paid from their

general fund or account for charitable purposes during the years

in issue and that the amounts paid were attributable to "instant

bingo" proceeds.   Respondent contends that petitioners have

failed to establish that they expended amounts from "instant

bingo" proceeds transferred to their general accounts in excess

of those stipulated by the parties.

     We do not agree with petitioners that a transfer of proceeds

from one account of an organization to another account of the

same organization is equivalent to a payment to an outside

charity for Federal tax purposes, or more precisely for the

purposes of sections 162(a) and 512(a).   Whether the transfers

qualified as disbursements for purposes of the Texas Act is not

dispositive of the Federal tax consequences.    Pursuant to section
                                  14

461, a deduction allowed by section 162 "shall be taken for the

taxable year which is the proper taxable year under the method of

accounting used in computing taxable income."   In the opening

brief, respondent asserts that petitioners used the cash basis to

determine UBTI.   Petitioners have not objected to respondent's

assertion in their reply brief.    However, based on the Forms 990,

it appears FSEP used the accrual method of accounting, and we

shall decide the issue accordingly.

     Section 162 grants a deduction for ordinary and necessary

business expenses that are "paid or incurred during the taxable

year."   Generally, a cash basis taxpayer may deduct business

expenses only in the taxable year in which the expenses are paid.

Sec. 1.461-1(a)(1), Income Tax Regs.   An accrual basis taxpayer

generally may deduct expenses in the taxable year in which a

liability is incurred.   Sec. 1.461-1(a)(2), Income Tax Regs.    A

liability is incurred in the taxable year in which:   (1) All the

events have occurred that establish the fact of the liability;

(2) the liability can be determined with reasonable accuracy; and

(3) economic performance has occurred with respect to the

liability.   Id.; sec. 461(h).

     We think that the transfer of "instant bingo" proceeds to an

organization's general fund is no more deductible than would be a

contribution to a reserve for future liabilities.

     the case law has long followed the principle that a
     contribution to a reserve for future liabilities is not
     deductible; only actual payment out of the reserve to
                                  15

     satisfy a definite liability can give rise to a deductible
     expense. Whether the reserve payments are mandatory is not
     dispositive of the issue of their deductibility. * * * In
     Hradesky, we held that a cash basis taxpayer's required
     payment of real estate taxes in escrow is not a deductible
     payment until payment out of escrow is made to satisfy the
     taxpayer's tax liability. Until payment is made of an
     actual liability that is due, no deductible expense exists.
     This rule has been followed for more than 60 years. * * *

Sebring v. Commissioner, 93 T.C. 220, 225-226 (1989) (citations

omitted).

     Sections 162(a) and 512(a) do not allow petitioners to take

business expense deductions for funds deposited into their own

operating accounts.    FSEP, Schoenstatt, and ACADA have not

established that they are entitled to deductions with respect to

"instant bingo" in excess of amounts allowed by respondent.

     WSA has established that it paid $1,237.60 to its bookkeeper

during 1989.    Respondent argues that WSA has failed to establish

that any portion of this amount is allocable to "instant bingo"

and that the amount allocable to WSA's tax-exempt income is not

deductible.    Sec. 265.   We find that WSA is entitled to a

deduction under sections 162(a) and 512(a) in the amount

determined by applying the ratio which WSA's instant bingo

proceeds bear to its total gross proceeds to the total fees of

$1,237.60.

Excess Contributions

     The remaining issue for decision is whether WSA is entitled

to deduct as a business expense the entire amount of its payments

to outside charities.
                                16

     Respondent argues that Texas law only requires that 35

percent of net "instant bingo" proceeds from the prior quarter be

expended for charitable purposes and that any payments in excess

of the 35-percent requirement (excess contributions) were

voluntary and not directly connected with petitioners' "instant

bingo" activities, and thus are not deductible under sections

162(a) and 512(a).

     Petitioners argue that their position is supported by South

End Italian Independent Club, Inc. v. Commissioner, 87 T.C. 168

(1986).   On the other hand, respondent maintains that this case

is distinguishable from South End Italian Independent Club, Inc.

with respect to excess contributions.

     In South End Italian Independent Club, Inc., the Court

considered whether a social club’s donations from beano game

proceeds were deductible as business expenses in determining

UBTI.   Massachusetts law provided that the profits from beano

"'shall be used for charitable, religious or educational

purposes, and shall not be distributed to the members of such

organization.'"   Id. at 169 (quoting Mass. Gen. Laws Ann. ch. 10,

sec. 38 (West 1980).   In holding that the donations were not

charitable contributions, the Court stated:

          First, petitioner’s payments were made in compliance
     with a Massachusetts law requiring the donation of the "Net
     Proceeds" of petitioner's beano games. Given the legal
     compulsion surrounding petitioner's making of the donations,
     they can hardly qualify as voluntary charitable
     contributions. * * *
                                   17

          Further, the Club's beano license could be revoked if
     petitioner were to violate the donation requirement of the
     Massachusetts Beano Law. Accordingly, obtaining the
     assurance that its license would not be revoked for failure
     to comply with that requirement was itself a quid pro quo
     for the donations. * * *

Id. at 176.    The Court held that the donations "were clearly

necessary, in the strict sense of the word, to the lawful conduct

of beano games by petitioner since they were required by

Massachusetts law as a condition to the retention of its license

to operate such games."      Id. at 177.   The donations were held to

be currently deductible as ordinary and necessary expenses under

section 162 "in the nature of an annually recurring license

expense."     Id.   The taxpayer was allowed a deduction under

section 512(a) for the entire amount of donations paid.

     Respondent argues that South End Italian Independent Club,

Inc. v. Commissioner, supra, is distinguishable based upon the

Massachusetts regulations.     Respondent argues that it appears

that the Court interpreted Massachusetts law as requiring the

taxpayer to distribute its entire net proceeds for lawful

purposes on an annual basis in order to retain its bingo

license.9   For support, respondent construes the regulations,

Mass. Regs. Code tit. 961, sec. 3.05(3)(a)(3)(1980), as providing

that the balance of unexpended net proceeds in an organization's



9
     As a factual matter, there is some indication that the
taxpayer in South End Italian Independent Club, Inc. v.
Commissioner, 87 T.C. 168 (1986), did not distribute its entire
net proceeds on an annual basis. See id. at 171 & n.3.
                                 18

beano account could not exceed the lesser of $50,000 or the

amount of net proceeds reported on the organization's annual

report most recently filed annual report.    Respondent argues that

the Texas Act is distinguishable in that section 11(d) of the Act

does not require that net proceeds be devoted to charitable

purposes within a particular taxable year.

     In our view, respondent is attempting to narrow the holding

of South End Italian Independent Club, Inc. v. Commissioner,

supra.   Respondent relies on a temporal constraint that is not

expressed in the Court's opinion.     Further, we do not infer from

the Court's opinion that such a requirement was necessarily

contemplated.   See supra note 9.

     In addition, it is clear WSA risked losing its bingo license

if it used any part of its net bingo proceeds, above or below the

minimum amount, for other than charitable purposes.    Respondent

contends that an organization's license will not be suspended if

the organization makes the minimum charitable disbursements.

However, an organization must also comply with section 11(d) of

the Act which requires that net proceeds from bingo be devoted to

charitable purposes.   If the agency responsible for regulating

bingo finds that an organization has disbursed funds for a

purpose other than for payment of expenses allowed under the Act

or for charitable purposes, the agency will issue a "show

compliance letter."    Administrative actions thereafter may lead

to revocation or suspension of such organization's license.
                                19

Thus, by making the contributions, WSA obtained the assurance

that its bingo license would not be revoked or suspended, and the

assurance was quid pro quo for the contributions.      See South End

Italian Independent Club, Inc. v. Commissioner, supra.      The

license allowed WSA the privilege of conducting bingo games, a

fund raising activity; thus, the organization received an

economic benefit in return.

     Based on our analysis, WSA's excess contributions qualify

for deduction as ordinary and necessary business expenses rather

than as charitable donations.   Therefore, the excess

contributions are deductible under section 162(a).     Further, the

excess contributions are directly connected to WSA's "instant

bingo" activities.   We conclude that the payments made by WSA

from its bingo account to outside charities are deductible in

full under sections 162(a) and 512(a).

     To reflect the foregoing and the concessions made by

respondent,


                                          Decisions will be entered

                                     under Rule 155.
