*255 Decision will be entered under Rule 50.
A national bank, on the cash basis, paid checks drawn or endorsed by its depositors. Some of the checks were lost or returned during the taxable year before they had been charged to the depositors. Held, the amount of such checks is deductible under section 23 (f), as a loss sustained during the taxable year.
*357 The Commissioner determined a deficiency of $ 113.95 in declared value excess profits tax for 1943 and $ 3,044.78 in excess profits tax for the short taxable year January 1 to October 18, 1943. One of the issues raised in the petition was settled by a stipulation, to which effect will be given under Rule 50. The remaining issue is whether the Commissioner*256 erred in disallowing an amount which the petitioner had deducted from gross income as a loss.
FINDINGS OF FACT.
The petitioner is a national banking association, with its principal office at Bellflower, California. Its books were kept and its returns for the periods here involved were filed on a cash basis with the collector of internal revenue for the sixth district of California. Its income and expenses for the period after October 18, 1943, were reported in a consolidated return filed by the Transamerica Corporation, with which it is now affiliated.
*358 The petitioner kept in its general ledger a daily account of the total deposits, withdrawals, and balances of its commercial depositors. The general ledger was balanced daily and it was in balance at all times material hereto. The petitioner also kept separate accounts for each depositor in an individual ledger, which was balanced weekly with the general ledger. The individual ledger consisted of ledger sheets which were bound into four or five alphabetical sections. Sometime during June 1943 the aggregate of the individual ledger balances was approximately $ 2,100 in excess of the corresponding general ledger balance.
*257 The discrepancy was due to errors in the individual ledger. Each section of this ledger, consisting of approximately 500 accounts, was kept by a separate bookkeeper. Deposit slips and depositors' checks were posted to the individual ledger accounts after they had been posted to the general books. Subsequently the deposit slips were filed together and the checks were filed alphabetically in depositors' files.
During part of June and throughout July 1943 the individual ledger was thoroughly checked for errors. The bookkeepers, under the supervision of the officer in charge, were able to reduce the discrepancy to approximately $ 1,800 on or before July 10, 1943. On that date the discrepancy was first reported to the petitioner's president. In the meanwhile, depositors had called for their June statements and about two-thirds of those statements had been prepared and delivered, together with canceled checks.
An intensified search for the cause of the discrepancy was made for the next twenty or thirty days, including nights and holidays. Practically all of the petitioner's employees participated in the investigation. They checked all of the depositors' statements and canceled checks*258 on file, including the June statements which had not been delivered. They checked all of the deposit slips against the tellers' sheets and then checked the deposits against the individual ledger. They checked the entire ledger by listing old balances, adding deposits and deducting checks, in order to prove the accuracy of the posting. In doing so they found errors which had been made in picking up balances incorrectly, with the result that the discrepancy was reduced to $ 1,727.80.
On September 30, 1943, the sum of $ 1,727.80 was charged to undivided profits in the general ledger in order to bring the books into balance. Between the date of the charge-off and the end of the taxable year an additional error of $ 1.30 was identified and corrected, which reduced the charge-off to $ 1,726.50, Later the charge-off was confirmed by a national bank examiner.
The petitioner's investigation did not cover the checks which had been returned to depositors with the June statements, and the petitioner's president believed that the remaining errors were due to a *359 failure to post to the individual ledger checks which had been lost or returned. During 1943 the petitioner had a turnover*259 of bookkeepers and it had difficulty with inexperienced bookkeepers. A majority of its bookkeepers were apprentices who, at the end of six months, obtained employment in war industries at higher salaries.
At the request of the petitioner's board of directors the auditing and inspection department of the Bank of America made an examination of the petitioner in January 1945. An inspector and three assistants conducted the examination over a period of six weeks. They devoted more than a week to an investigation of the discrepancy which had occurred in June 1943. The auditors found no evidence of embezzlement. They reached the conclusion that the final discrepancy resulted from the failure to charge depositors' accounts for checks issued, or from not charging back to endorsers items credited to their accounts and upon which payment was refused. They thought that such failure was due to the fact that the checks were returned or lost.
The final discrepancy of $ 1,726.50 was deducted in the petitioner's return for the period ended October 18, 1943. The discrepancy was caused by the loss or return of checks during June or July 1943 after they had been paid by petitioner or credited*260 to their depositors, but before they had been charged to the proper accounts of the depositors who had drawn or endorsed them. The petitioner has never been compensated for such checks by insurance or otherwise. The experience of the bank was that, if depositors were aware of mistakes made by the bank in their favor, they did not always voluntarily call them to the bank's attention. The petitioner bank could not reasonably expect the errors to be called to its attention under the facts shown.
OPINION.
The basic question in this proceeding is whether the evidence shows that the petitioner had "losses sustained during the taxable year" within section 23 (f) of the Internal Revenue Code.
Counsel for the respondent orally stipulated at the hearing that the petitioner's general ledger was "in balance at all times." The effect of that stipulation is to eliminate the general ledger as a possible source of any of the errors which caused a discrepancy between the petitioner's individual and general ledgers during June 1943.
The original discrepancy of approximately $ 2,100 was due to several types of errors in the individual ledger. The petitioner's subsequent investigations resulted in*261 a reduction of the discrepancy to $ 1,726.50. That reduction was due to the discovery of mechanical or mathematical errors, and the evidence satisfies us that such errors were eliminated beyond any reasonable doubt. The investigations also proved that there was no error on the deposit side of the ledger.
*360 The petitioner exhausted every means of tracing the error, or errors, through the records remaining in its possession. It had all of the records except the checks which had been returned to its depositors. The inference which must be drawn from all the evidence is that the final discrepancy was due solely to the loss or return of checks paid by petitioner before they had been charged to the proper individual accounts of the depositors drawing or endorsing the checks. We have given effect to that conclusion in our findings of fact.
The findings of ultimate facts are contrary to the respondent's basic premise, i. e., that the nature of the error is not known. From that premise the respondent argues that a charge-off to balance books is not sufficient in and of itself to entitle the petitioner to a deduction for a loss. See Albert Nelson, 6 T. C. 764, 772;*262 Columbia Envelope Co., 21 B. T. A. 1270; Fair Store Corporation, 11 B. T. A. 1033; Union Savings Bank, 10 B. T. A. 1175. Those cases are clearly inapplicable, however, where, as here, the evidence establishes that petitioner actually sustained a loss.
The final phase of the respondent's argument is that, since the petitioner is on a cash receipts and disbursements basis, it "could not be said to have felt the effect of the bookkeeping error until the depositor whose account was in error withdrew from the bank more than he was correctly entitled to." That theory obviously ignores the fact that the petitioner actually made cash payments for the checks which were lost or returned before they had been charged to the depositors. The general ledger shows that the petitioner paid out its funds when the checks were presented for payment. It made payments over the counter or through clearing house transactions. The payments were made to or on behalf of its depositors during the taxable year.
In the normal course of events the petitioner would have reimbursed itself for payment of the checks by making*263 charges to the depositors' accounts. The facts show that it failed to do so, and, during the taxable year, could not do so, because the checks upon which it had made payments had been lost or returned. Thus the petitioner had lost the only evidence it had of its right to charge the proper individual accounts of the depositors who had drawn or endorsed the checks upon which it had made payments. It was then out of pocket with nothing more than a remote hope of recovery for which it was entirely dependent upon the voluntary action of its depositors. Cf. United States v. White Dental Mfg. Co., 274 U.S. 398">274 U.S. 398. The evidence indicates that recovery by reason of the voluntary action of depositors in rectifying mistakes in their accounts made in their favor was no more probable than the recovery, by reason of the debtor's voluntary action, of a debt *361 made legally uncollectible by the discharge in bankruptcy of the debtor. The loss or return of the checks rather than the charge made against petitioner's undivided profits account was the event which fixed the petitioner's actual loss under the statute, and closed the transaction beginning with *264 its payment of the checks. However, the charge-off is pertinent in that it evidences the judgment of the petitioner's officers that an irrecoverable loss had been sustained in the taxable year. In our opinion their judgment is supported by the facts. We hold that the loss in question was sustained during the taxable year and therefore is deductible under section 23 (f).
Decision will be entered under Rule 50.