SC Administrative Law Court Decisions

STATEMENT OF THE CASE

This matter came before the Administrative Law Judge Division upon the request of the Petitioners, Congaree Unit 90 Ladies Auxiliary American Legion, Licensee, and U.S.A. Management, Inc., Promoter to review the denial of their application for renewal of a Class AA Bingo License by the Department of Revenue. After notice to the parties, a hearing was conducted on September 30, 1996.

Based upon the evidence and testimony presented, the application for a Class AA Bingo license is granted. Any issues raised during the proceedings in this case that are not specifically addressed in the order are deemed denied. ALJD Rule 29.

FINDINGS OF FACT

I make the following findings of fact, taking into consideration the burden on the Petitioners to establish their case by a preponderance of the evidence and taking into account the credibility of the witnesses:

1. Petitioner, Congaree Unit 90 Ladies Auxiliary American Legion (Auxiliary), is a non-profit organization that currently holds a Class AA Bingo License issued by the Department in 1995.
2. Auxiliary sponsors youth at Girls State, Boys State, boy scouts, girl scouts and it conducts the local oratorical contest, a part of the national contest sponsored by American Legion.
3. U.S.A. Management, Inc., of North Augusta, South Carolina (USA Management) is a South Carolina corporation whose business is to conduct the game of bingo as a promoter under the laws of South Carolina.
4. The Auxiliary filed an application to renew its Class AA Bingo license and attached a copy of its contract with USA Management. The contract is identical to the one attached to its original application for a bingo license. None of the provisions has changed.
5. USA Management applied for a promoter's license to conduct bingo on behalf of Auxiliary. The license was granted.
6. The Department's final determination letter dated July 1, 1996 denied the renewal of the Class AA bingo license for several reasons that encompass the following: the contract with the promoter does not state his compensation; the compensation to the promoter is not "necessary and reasonable"; the licensed organization fails to control all deposits and disbursements; and Auxiliary is being used as a "front" for the promoter to obtain access to a bingo license.
7. Paragraph 21 of the contract between USA Management and Auxiliary provides the compensation to be paid to USA Management. It states: Management's compensation shall be the gross proceeds less prizes awarded as defined in the [Bingo] Act less monies paid Sertoma [sic] as provided by paragraph (5) of this Agreement, less the payment of necessary and reasonable bona fide expenses incurred and paid in connection with the conduct of Bingo.
8. Paragraph 5 of the contract states that USA Management guarantees Auxiliary a minimum monthly cash payment for Bingo operations of $1000 per month or five percent of the net proceeds per quarter as defined in the quarterly financial statement filed with the Department. The paragraph also authorizes the payment of additional proceeds received from Bingo operations for the benefit of Auxiliary.
9. Pursuant to contract, USA Management provides all of the necessary equipment, personnel, advertising, insurance, licensing fees, taxes and location to conduct the game of bingo. These were all incurred as expenses by USA Management to conduct bingo for Auxiliary.
10. Specifically, the average monthly expenses incurred by USA Management included the following: rent - $10,000, utilities - $1387, coordinators to bring people to the games - $27,477, advertising - $4953, license fees - $588, promotional prizes - $500, bingo paper - $1216, and other expenses (bond, repairs, maintenance) - $2950. Salaries were paid to those persons who worked at the monthly games totaling $5175.
11. The average monthly expenses of USA Management to conduct the game of bingo for Auxiliary was $54,246. The average monthly net proceeds (after payment of prizes and taxes) before any payment to Auxiliary was $45,000. The average monthly net loss was $10,422.
12. Auxiliary did not have any input or control regarding the expenses incurred on its behalf to conduct the monthly bingo games.
13. Each month when the bingo games were played, Auxiliary had a representative at the games. This representative was in addition to Julie Mosley who is employed by USA Management and is a member of the Auxiliary.
14. Ms. Mosley attends regular meetings of Auxiliary and has been a member of Auxiliary for at least two years. Other members of the organization were designated as the representative to attend the bingo games.
15. Julie Mosley had been employed by USA Management before becoming a member of the Auxiliary. Her responsibilities at the bingo game were to handle the funds and the requisite paperwork to ensure that the money was recorded for tax purposes, to calculate the percentage of prize money awarded, and to make the deposit into the Auxiliary bingo bank account. Mosley was responsible for completing the deposit slips and depositing the money into the bank night deposit box.
16. The Auxiliary maintained a "Bingo Account" to deposit the proceeds from the monthly games. Persons authorized to sign checks on behalf of the Auxiliary were Betty S. Hutchins, president of the Auxiliary; Cecil Barnes, the sole shareholder and owner of USA Management; and Norman Stafford, the accountant for USA Management.
17. Most checks were written by the bookkeeper for USA Management or Stafford and signed by Barnes and Stafford. Although, Mrs. Hutchins had signature authority, she rarely signed checks for the payment of expenses associated with the bingo game. Often the checks were signed without her prior knowledge. Stafford provided an accounting of the disbursements from the bingo account.
18. Although its major sources of funding is from bingo proceeds, Auxiliary conducts other activities to raise funds. These include the operation of the canteen at the American Legion softball games and the collection of annual dues from its members from which a portion is used locally.
19. None of the advertising for the bingo games mention the Auxiliary as a recipient of the proceeds. Paragraph 19 of the contract between USA Management and Auxiliary specifically prohibits the use of Auxiliary's name in connection with any advertising of the bingo game.
20. The promoter applied for renewal of its promoter license to conduct bingo on behalf of Auxiliary. The license was renewed.

CONCLUSIONS OF LAW

Based on the foregoing Findings of Fact, I conclude, as a matter of law, the following:

1. Pursuant to S.C. Code Ann.  1-23-310 et. seq. (Supp. 1995), the South Carolina Administrative Law Judge Division has jurisdiction over this matter.
2. Pursuant to S.C. Code Ann.  12-21-3440 (Supp. 1995) defines a Class AA license as:

An organization operating a bingo game offering prizes with a minimum payout of fifty thousand dollars a session shall obtain an annual Class AA bingo license at a cost of four thousand dollars a year. The prizes offered at any one session may not exceed two hundred fifty thousand dollars. The holder of a Class AA license may not conduct more than one bingo session a month.
3. S.C. Code Ann.  12-21-3340(C) (Supp. 1995) requires each applicant or licensee to file an application for renewal each year submitting all the information and documentation required in the original application.
4. One of these documents is a copy of the contract between a promoter and the organization. S.C. Code Ann.  12-21-3340(A)(7) (Supp. 1995). All contracts with a promoter must be in writing and "must state the promoter's compensation, percentage of net proceeds or both, if any, for operating the game." S.C. Code Ann.  12-21-3370(A) (Supp. 1995).
5. Paragraph 21 of the contract sets forth the compensation to the promoter. It states that the promoter receives the gross proceeds from the game after payment of prizes, taxes, reasonable and necessary expenses associated with the game, and the $1000 per month or 5% of the quarterly net proceeds payment to Auxiliary. The provision is clear and unambiguous. The compensation of the promoter is ascertainable from reading the contract. It does not state a dollar amount nor does it state a percentage of the proceeds but it states the formula for calculating the compensation. USA Management is entitled to all of the net proceeds of the game except $1000 or 5% of the quarterly net proceeds.
6. The law does not require that a specific dollar amount be stated as compensation for the promoter. The contract is not objectionable simply because calculations have to be performed to determine the monthly compensation. The law allows for the compensation to be stated as a percentage of net proceeds, which requires some calculation. The fact that USA Management's compensation has to be calculated is not a sufficient basis to deny the license.
7. The Department next objected to the issuance of the bingo license because it determined that the expenses incurred were not necessary and reasonable. The expenses incurred by USA Management appear to be necessary and reasonable expenses. Although one would question the efficacy of continuing to operate bingo games month after month at a loss, the expenses do not on their face appear to be unreasonable. There was no evidence to demonstrate that the expenses are not necessary to conduct the game or that the amount of the expenses is unreasonable.
8. S.C. Code Ann.  12-21-3480 (Supp. 1995) states:

(A) A member of the nonprofit organization, other than the promoter, is required to be present at the bingo game.
(B) Upon completion of the session, the promoter shall turn over to the representative member of the nonprofit organization the gross proceeds from the session less the amount paid out as prizes.
(C) The representative member of the nonprofit organization shall deposit the funds into the bingo checking or savings account as described in Section 12-21-3490.
9. The evidence demonstrates that another person other than Julie Mosley attended each session of bingo conducted on behalf of Auxiliary. Julie Mosley attended the sessions not as a representative of the organization but as an employee of the promoter. Ms. Mosley's job for the promoter was to keep track of the funds throughout the night. She counted it, calculated the required amount to be given as prizes and calculated the amount of tax to be reported. She maintained all of the paperwork concerning the money. Her responsibilities throughout the session were controlled by the promoter. At the end of each session, Julie Mosley made the deposit. Pursuant to Section 12-21-3480, the money should have been given to the representative of Auxiliary for her to deposit into the account. Ms. Mosley was not attending the sessions as a representative of the nonprofit organization. Therefore, she could not be the representative to receive the proceeds or deposit them on behalf of the nonprofit organization.
10. Pursuant to S.C. Code Ann.  12-21-3490(B), the nonprofit organization is to control all deposits, transfers, and disbursements from the bingo account, including the payment of compensation to the promoter and its employees working the bingo game. The evidence clearly reveals that three persons had signatory authority on the bingo account. Two of these were persons employed by or affiliated with the promoter. The other person is the president of the nonprofit organization. The checks were generally signed by the promoter. Although the nonprofit organization was aware of the expenditures from the account, it became aware of the disbursements after they were made. The promoter admits that by having signature authority disbursements could be made without the prior knowledge or consent of the nonprofit organization.
11. The promoter argues that the law does not prohibit the promoter from having signature authority over the bingo account and in fact amendments to the Bingo Act effective October 1997 clearly provide that the promoter and the nonprofit organization shall sign checks making disbursements from the bingo account. See Act No. 449 of 1996, Section 1, Section 12-21-4090(D). Having the promoter as a signatory to the account does not remove the requirement that the nonprofit organization exercise control over all deposits, transfers and disbursements. In this case, the nonprofit organization did not exercise such control.
12. Although the failure of the organization to have its representative deposit the funds and the failure to sign the checks are violations of the Bingo Act, the Department never sought to issue any violations. These violations are serious, but not so egregious as to deny Auxiliary the opportunity to take corrective action. Auxiliary is on notice about these deficiencies and must take steps to correct these problems to comply with the law. To deny the application on the basis of acts that can be remedied and deprive the organization of the benefits derived from the playing of Bingo does not seem justified.
13. S.C. Code Ann.  12-21-3340(A) (Supp. 1995) provides that a nonprofit organization applying for a bingo license must provide, among other things, the following information:

(1) the name and address of the applicant and sufficient facts relating to its incorporation and organization to enable the department to determine whether it is an authorized corporation;
(2) a copy of the organization's corporate charter and the Internal Revenue Service's statement exempting the applicant from federal income taxes;
(5) the specific purpose to which the bingo net proceeds are to be devoted;
(6) the designation of a "promoter";
(7) a copy of any contract between a promoter and the applicant;
14. The Department does not challenge Auxiliary's status as a nonprofit organization. It states, however, that Auxiliary is not an authorized corporation because of the manner in which the game of bingo will be and has been conducted on its behalf. According to the Department, Auxiliary is nothing but a "front" for USA Management to conduct bingo as a professional operation and not for the benefit of the nonprofit organization.
15. The term "authorized corporation" is not defined in the statute nor is the term "authorized" defined. There are no regulations promulgated by the Department to interpret the Bingo Act.
16. "A statute subject to interpretation is presumed not to have been intended to produce absurd consequences, but to have the most reasonable operation that its language permits. If possible, doubtful provisions should be given a reasonable, rational, sensible, and intelligent construction. These rules prevail where they are not restrained by the clear language of the statute. Under this rule, general terms in a statute should be so limited in their application as not to lead to absurd consequences." 73 Am. Jur. 2d Statutes 265.
17. The Department has had an opportunity to review and discuss provisions of the Bingo Act in public documents. Although these documents do not specifically address what is an authorized corporation, they provide some guidance on how the Department interpreted Section 12-21-3340. In Revenue Ruling 89-23 effective October 1, 1989, the Department posed various questions and answers interpreting the new act. Section 12-21-3340(A)(1) was specifically cited by the Department in the context of determining whether an organization is a nonprofit organization. The Department specifically cited this section along with Section 12-21-3340(A)(2) and (A)(7) to determine whether an organization is one that is a tax-exempt nonprofit organization eligible to obtain a bingo license. The Department concluded that a local chapter of a national organization may not use the IRS exemption letter issued to the national organization, unless the IRS has issued to the national organization a "Group Exemption Letter" which includes the applicant organization as a local chapter falling under the provisions of the group exemption letter. The burden of proof that the applicant organization falls within the provisions of a Group Exemption Letter is upon the applicant organization.
18. The Department used the same statutes again in Revenue Ruling 93-3 when it discussed the domicile and organizational requirements of the bingo act. The revenue ruling again posed various fact scenarios for discussion. The Tax Commission concluded that in determining whether an organization is eligible for a bingo license, the department must determine whether the applicant is a distinct organizational entity and not merely a separate location of an organization that already has a bingo license.
19. A reading of Section 12-21-3340(A)(1) in light of these Revenue Rulings reveals that authorized corporation means an organization whose structure and operation are separate and distinct from any national or adjunct organization so as to entitle the organization to its own bingo license. The interpretation proposed by the Department at the hearing is not consistent with its own interpretation of the statute nor is it one that can be given a "reasonable, rational, sensible and intelligent construction."

ORDER

Based on the above Findings of Fact and Conclusions of Law, it is hereby

ORDERED, that the application of Congaree Unit 90 Ladies Auxiliary American Legion to renew its Class AA Bingo License is hereby granted. It is further ORDERED, that Auxiliary shall take corrective action so that its authorized representative present at the bingo session deposits the money after that session and that the Auxiliary signs each check for disbursement of funds from the bingo account.

AND IT IS SO ORDERED.

______________________________
ALISON RENEE LEE
Administrative Law Judge

October _____, 1996
Columbia, South Carolina