Dally encounters the police after he is on the run for holding up a liquor store. He frantically called Darry's house, asking for help, and the gang agrees to meet him in the vacant lot. As Dally nears the vacant lot, the police are also right behind him. He makes the fatal mistake of showing his gun, and the police open fire. Dally is shot down under the street light, right in front of his friends.
Later, Ponyboy reflects that Dally pulled his gun on the police because he wanted to die. The older, streetwise boy knew the police would open fire if he were armed.