*240 Decision will be entered under Rule 50.
Petitioner bank was closed by the State Superintendent of Banks on October 30, 1931, and it reopened in 1932 after most of the depositors waived one-third of their deposits, under a plan whereby the depositors received certificates entitling them to share in the proceeds of the liquidation of designated assets. Under the plan the petitioner was to receive the first $ 5,530,036.25 of the proceeds of liquidation and a trustee for the certificate holders the balance up to $ 2,528,461.02. In 1942 petitioner had not recovered its senior interest, but it extinguished the junior interest of the certificate holders by paying the trustee $ 531,010.08. There was an accounting action then pending against the trustee and bank brought by some certificate holders for the benefit of all, and petitioner settled this action by paying a net of $ 125,000. Held, if petitioner realized forgiveness of debt income by reason of the deposits waived in 1932, it was not realized in any year later than 1942 when it bought out the junior interest of the certificate holders. Held, further, petitioner was entitled to take gains or losses on the sale or disposition*241 of certain assets in 1943, 1944, and 1945, on its pre-reorganization basis and petitioner was entitled to deduction for sums paid in settlement of the accounting action.
*960 The respondent determined deficiencies in income, declared value excess-profits, and excess profits taxes against the Federation Bank & Trust Company, as follows:
| Declared value | |||
| excess-profits | |||
| Year | Income tax | tax | Excess profits tax |
| 1943 | $ 34,695.33 | $ 7,640.88 | |
| 1945 | 36,559.45 | 278,326.04 | $ 1,414,140.40 |
The issues in this case are (1) whether the petitioner realized income in 1945 as a result of a cancellation of indebtedness in that year; (2) whether the petitioner was entitled to take gains or losses on the sale or disposition of certain assets in 1943, 1944, and 1945; (3) whether the petitioner was entitled to use its pre-reorganization basis or some *961 other basis in certain assets in computing gains or losses on their sale or disposition in the years 1943, 1944, and 1945; (4) whether the petitioner is entitled to a deduction in 1945 for a net operating loss carryover from 1944; and (5) whether the petitioner is entitled to deduct as an ordinary and necessary business expense in 1945 the sum of $ 125,000 paid*243 during that year in settlement of certain legal proceedings. 1
FINDINGS OF FACT.
Some of the facts have been stipulated and they are found accordingly.
Petitioner is a domestic banking corporation organized under the laws of the State of New York. At all times material herein, it was engaged in the conduct of general banking business in New York City.
Petitioner's books of account were kept on the accrual basis and its tax returns for the calendar years 1943 and 1945 were filed with the then collector of internal revenue for the third district of New York.
On October 30, 1931, the Superintendent of Banks of the State of New York (hereinafter referred to as the superintendent) took possession of the business and properties of the petitioner under provisions of the then section 57 of the Banking Law of New York for the purpose of liquidating its affairs. On said date, petitioner's authorized capital stock consisted*244 of 7,500 shares of common stock of par value of $ 100 per share.
Shortly after the superintendent took over the affairs of the petitioner, the petitioner's board of directors designated a reorganization committee (hereinafter referred to as the committee) for the purpose of formulating a plan whereby the petitioner might receive back its properties and be permitted by the superintendent to resume business operations. The committee, with the assistance of a representative of the superintendent, in due course agreed upon a plan for reorganizing the petitioner which was approved by the directors and stockholders of the petitioner. Very simply, the plan was to reduce deposit liability and to raise new capital.
On September 27, 1932, the Supreme Court of the State of New York (hereinafter referred to as the State court), upon the petition and recommendation of the superintendent, approved the plan and authorized the superintendent to permit the petitioner to resume business pursuant to the plan.
The following steps were taken by the petitioner pursuant to the plan of reorganization:
(1) Petitioner solicited and received from 8,224 of its 12,697 depositors *962 the execution of a*245 depositor's consent and an assignment. The depositor's consent, in pertinent part, is as follows:
The undersigned depositor of FEDERATION BANK and TRUST COMPANY, of Borough of Manhattan, City of New York, (hereinafter called the "Bank") in consideration of the execution by various other depositors of instruments similar to this and for the purpose of enabling said Bank to reopen and resume business under the Banking Law, hereby contributes and releases unto said Bank the entire right, title and interest of the undersigned in and to thirty-three and one-third (33 1/3%) percent in amount (computed to the nearest even dollar) of the balance of the deposit due on the account of the undersigned, as shown by the books of said Bank on the 21st day of December, 1931, hereby forever releasing and discharging said Bank of and from all liability whatsoever in respect to the amount so contributed and released, except as follows:
The Bank shall issue or cause to be issued to the undersigned, on or about February 15th 1932, the equivalent of the amount herein specified, in Capital Stock of the Bank as it shall be reorganized at the time of its reopening, at $ 50 per share, and/or, as the Reorganization*246 Committee of the Bank shall elect, a Certificate of Deposit executed by the Bank, and payable by it on or before February 15th, 1934, with interest on the amount evidenced by such Certificate until the same shall be paid, at the rate of 2% per annum, and/or a Participation Certificate.
This instrument shall become effective immediately upon the reopening of said Bank for the resumption of business under the Banking Law, provided such reopening occurs within sixty (60) days from the date hereof; otherwise this instrument shall become null and void.
When the petitioner failed to reopen within the 60-day period specified in the contents, the committee solicited and received from the same depositors an "assignment" which provided:
I (we) hereby assign to the Reorganization Committee of the Federation Bank and Trust Company the sum of $ of my bank balance in the Federation Bank and Trust Company to be used by the said Reorganization Committee for the purposes set forth in the Depositor's Consent heretofore executed by me.
The aggregate amount of the deposits covered by such consents and assignments secured from the depositors was $ 2,528,461.02.
(2) On September 30, 1932, the*247 petitioner and one John Hartnett as trustee entered into an agreement (hereinafter referred to as the trust agreement). John Hartnett served as trustee until February 1937, when he died. John E. Varley was then duly appointed as successor trustee. Both of these persons will hereinafter be referred to as the trustee. The trust agreement, more fully set out hereinafter, recited, among other things, that the committee had decided in its discretion to issue participation certificates to those depositors who had executed a consent and assignment. The participation certificates which were issued read, in pertinent part, as follows:
FEDERATION BANK AND TRUST COMPANY, a New York corporation, of 461 Eighth Avenue, Borough of Manhattan, City of New York, having executed a Trust Agreement dated September 30, 1932, granting to the undersigned *963 as Trustee, for the benefit of Participation Certificate holders referred to therein, a junior participation in certain assets of the said Trust Company, and certain shares of stock of said Trust Company having been deposited with the undersigned, as Trustee, as security for the payment of said participation certificates,
This Is to Certify*248 that
is the owner of an equitable interest in the proceeds received by the undersigned, as Trustee, from the liquidation of said assets and from the proceeds of said shares of stock, pursuant to the terms of said Trust Agreement, to the extent to which $ bears to the total sum received by the undersigned, as Trustee, in accordance with the terms of said Trust Agreement, and by virtue thereof is entitled to participate in all sums received by the Trustee, pursuant to said Trust Agreement, in said ratio. Distribution of such proceeds shall be made by the undersigned, as Trustee, to the registered holders of participation certificates, pro rata, from time to time, as in said Trust Agreement provided. Before making any distribution, the undersigned, as Trustee, may require the presentation to him of participation certificates for notation thereon of the amount of such distribution.
This certificate and all rights represented hereby are transferable only subject to the provisions of said Trust Agreement on the books of the undersigned, as Trustee (such books to be kept at the principal office of said Trust Company in the Borough of Manhattan, City of New York), by the registered*249 holder hereof in person or by duly authorized attorney, upon surrender of this certificate properly endorsed, subject to such regulations covering transfers as the undersigned, as Trustee, may adopt. It is a condition of this certificate that the holder hereof and every successive holder hereof by accepting this certificate becomes a party to said Trust Agreement, and is bound by the terms and provisions thereof in the same manner and with the same effect as if he had executed and delivered the same, and is entitled to the rights and interests of a holder of a participation certificate as the same are specified and defined in said Trust Agreement.
Such depositors as received these certificates are hereinafter referred to as participation certificate holders.
(3) As a part of the plan of reorganization, the petitioner and its stockholders agreed to reduce the par value of its capital stock from $ 100 to $ 10, and to issue 82,500 shares of new stock. Of this, 75,000 shares were sold at $ 20 per share to new investors to yield $ 1,500,000 new capital. The remaining 7,500 shares were issued to the old stockholders share for share in exchange for their old $ 100-par-value stock. *250 Pursuant to the reorganization plan, old stockholders entitled to 6,980 shares of the new stock consented to the issuance of their stock to the trustee to be held by him under a security plan. The plan was that the trustee would collect dividends on the stock and if the participation certificates were not redeemed within 6 years the stock would be sold and the proceeds, including dividends collected, applied towards the redemption of the certificates. This stock was sold by the trustee at public auction on November 9, 1938, for $ 23,657.74. Prior to the sale, the trustee had collected $ 11,517 in dividends. By *964 reason of the foregoing, the trustee collected and held for the benefit of the participation certificate holders the sum of $ 42,276.51 ($ 1,078.23 having been disbursed by the trustee as expenses in connection with the stock). This phase of the reorganization is not at issue, and will be largely disregarded, except as it figured in respondent's computation of the amount of deficiency.
Another item which seems to be of interest solely with respect to Commissioner's computation is the sum of $ 8,492.94 which the stipulation states was the net amount paid the trustee*251 by reason of the petitioner's receipt of net income from the assets in excess of 6 per cent after "various net adjustments."
Using the consents and assignments as authority, petitioner reduced its deposit liability on its books on October 1, 1932, in the total amount of $ 2,528,461.02 and also reduced the deposit balance shown on each consenting depositor's record by one-third, usually to the nearest dollar. This reduction in deposit liability was also disclosed in petitioner's 1932 income tax return but no effect was given thereto. Upon completion of the foregoing steps, the petitioner was permitted to resume operations by the superintendent on October 3, 1932.
The record shows there was $ 1,059,111.40 cash and due from banks at the time petitioner closed in 1931. There was attached to the trust agreement a list of all the assets of the petitioner except cash, furniture, and fixtures of a total value of $ 8,936,942.60. This is the total value of such assets on petitioner's books, which values were the adjusted bases of the assets as of September 30, 1932, under section 113 of the Internal Revenue Act of 1932. With respect to these assets, the trust agreement provided, in part, *252 as follows:
Whereas: The board of directors of the Bank has approved the execution of this Agreement, and the stockholders of the Bank have approved an agreement to convey to such Trustee certain assets of the Bank for the benefit of participation certificate holders and approved the execution of an agreement in this form; and
* * * *
First: The Bank agrees to liquidate, in so far as it is able to do so, and at such time or times as it shall deem proper, its stocks, bonds, mortgages, loans, accounts receivable and real estate having an aggregate value on its books of $ 8,936,942.60 as per schedule of assets hereto annexed and marked "Schedule A". If in the course of such liquidation the Bank shall at any time deem it advisable to invest or reinvest any or all of the proceeds of liquidation, then the Bank shall be entitled to invest and reinvest such proceeds in any securities, including common stocks, as in its sole discretion it may deem advisable, and it shall not be liable for any investment or reinvestment so made except for its gross negligence or bad faith. The Bank may at any time unconditionally apply any part of the proceeds of the liquidation of said assets or proceeds*253 of reinvestments to the reduction of its senior interest hereinafter referred to and the Trustee shall not be entitled to any profits arising from the subsequent use of such unconditionally applied monies.
*965 Second: The Bank does hereby give and grant to John Hartnett, as Trustee, and said Trustee does hereby accept, a junior participation in the amount hereinafter mentioned in the proceeds of the liquidation of the aforesaid assets after the Bank shall have first received from such liquidation the sum of $ 5,530,036.25 and interest thereon at the rate of 6% per annum from September 30, 1932, as more specifically set forth in paragraph "Fourth" hereof.
* * * *
Fourth: Upon completion of the liquidation, or at such prior time or times as the Bank may deem advisable, the Bank shall turn over to the Depositary hereinafter named for the account of the Trustee $ 2,528,461.02 of the proceeds in excess of $ 5,530,036.25 and interest thereon at the rate of 6% per annum from September 30, 1932, arising from the liquidation of the assets set forth in "Schedule A" hereto annexed, as provided in paragraph First hereof. Except as hereinafter provided, any further proceeds of liquidation*254 in excess of said sum of $ 2,528,461.02 shall be retained by the Bank for its own use. It is expressly agreed that no fund shall be turned over by the Bank to the Depositary for the account of the Trustee or to the Trustee except from the liquidation of said assets and no fund shall be turned over until the Bank shall have first received $ 5,530,036.25 and interest thereon at the rate of 6% per annum from September 30, 1932, for its own use from the liquidation of said assets. If the proceeds from the liquidation of said assets after the Bank shall have first received $ 5,530,036.25 and interest thereon do not amount to $ 2,528,461.02 then the Bank shall turn over to the Depositary for the account of the Trustee the amount resulting from the liquidation of said assets after the Bank shall have first deducted for itself said $ 5,530,036.25 and interest thereon, and the Bank shall be under no obligation to turn over to the Trustee or the Depositary for the Trustee's account any further sums, except as may be hereinafter specifically provided. * * *
The assets which the petitioner agreed to liquidate were not segregated and the possession and title remained in the petitioner. The *255 trustee was never consulted, and did not sign any deeds, bills of sale, or other papers in connection with liquidation of these assets.
On May 21, 1941, petitioner tendered a written proposal to the superintendent to purchase the outstanding equity of the participation certificate holders in the remaining unliquidated assets. Before this proposal was acted upon the senior interest of petitioner was reduced from $ 5,530,036.25 to $ 1,432,934.92 by liquidation of assets under the trust agreement. The petitioner's offer amounted to the difference between its remaining senior interest and the market value of the remaining unliquidated assets as determined by the examiners of the State Banking Department.
The proposal was approved by the superintendent and he informed the State court of his approval. The State court thereupon appointed a referee who approved the offer with slight modification and reported on December 24, 1941, that the offer to purchase was fair, just, reasonable, and in the best interest of all parties. The State court thereupon entered an order which, among other things, approved petitioner's offer to purchase a release and satisfaction of *966 the outstanding*256 junior interest in the assets remaining in its hands for the sum of $ 534,125.08, computed in accordance with the offer. The order deducted from this amount the expenses of the referee and further ordered:
(d) The balance of said purchase price, to wit, $ 531,010.08 to John Varley as Trustee for participation certificate holders for distribution by him pursuant to the provisions of the trust agreement * * *
and it is further
Ordered, that upon receipt of the aforementioned payment of $ 531,010.08 2 John Varley, as Trustee for the participation certificate holders, assign, transfer, deliver and release to Federation Bank and Trust Company all of his right, title and interest as such Trustee and all right, title and interest of the participation certificate holders in and to the junior participating interest in said segregated assets; and he is further authorized and directed to execute any and all instruments necessary to effectuate the release to Federation Bank and Trust Company and satisfaction of the outstanding junior interest in said segregated assets and it is further
Ordered, that this purchase of a release and satisfaction of the outstanding junior participating interest*257 in said segregated assets shall be without prejudice to the rights, if any, of any interested party to any accounting to which he may be entitled; and it is further
Ordered, that the Superintendent of Banks or Federation Bank and Trust Company, or John Varley, as Trustee, may at any time apply at the foot of this order for other or further relief in the premises.
Pursuant to this order, the petitioner paid $ 531,010.08 to the trustee who delivered to the petitioner an assignment and release on October 7, 1942. No effect was given this payment in petitioner's income tax returns. This assignment and release, after reciting the consideration, states in pertinent part:
do hereby Assign, Transfer, Deliver and Release to said FEDERATION BANK AND TRUST COMPANY all of my right, title and interest as such Trustee and all right, title and interest of the participation certificate*258 holders, parties to said agreement above referred to, in and to the junior participating interest of said participation certificate holders and of me as Trustee for said participation certificate holders in all segregated assets referred to in said trust agreement dated September 30, 1932 remaining in the hands of said FEDERATION BANK AND TRUST COMPANY * * *
On August 18, 1941, certain of the participation certificate holders brought suit in the State court against the petitioner and the trustee for an accounting. By agreement, issue was not joined until termination of the proceedings just described whereby petitioner acquired an assignment and release from the trustee. Issue was joined in this action November 21, 1942. On October 10, 1942, the trustee instituted an action in the same court for a settlement of his account as trustee *967 under the trust agreement. The petitioner thereafter was made a party to this action and both actions were consolidated.
Pursuant to an order of the court, the petitioner and the trustee filed an accounting to which certain of the participation certificate holders filed 36 objections covering 72 typewritten pages. Among other things, they*259 alleged that the trustee, while acting as such, was an employee of the petitioner who held the adverse interest, that the petitioner failed to liquidate assets properly, and generally that the petitioner and trustee mismanaged the trust. They thereby sought to surcharge the petitioner in the aggregate amount of $ 8,000,000.
On May 17, 1945, the petitioner and the trustee entered into a stipulation with the participation certificate holders, in part, as follows:
The attorneys for the undersigned parties hereto, in order to avoid further litigation and without any admission of liability on the part of Federation Bank and Trust Company, John E. Varley, as Trustee, or Jeremiah D. Maguire, Hereby Stipulate and Agree, subject to the approval of the Referee and the Court, that all controversies between the parties represented by said attorneys with respect to the accounts of proceedings of Federation Bank and Trust Company and John E. Varley, as Trustee, be settled and compromised on the following terms:
1. All objections heretofore filed against the accounts of proceedings of John E. Varley, as Trustee, and Federation Bank and Trust Company are to be withdrawn.
2. Federation Bank and Trust*260 Company, on the approval of this settlement by the Court, will pay to John E. Varley, as Trustee, the sum of $ 195,000., which sum shall be in addition to the sum of $ 8,492.94 which Federation Bank and Trust Company is holding for the benefit of John E. Varley, as Trustee, and which will be simultaneously paid over by it to the said John E. Varley, as Trustee. The said sum of $ 8,492.94 is the balance of the sum of $ 8,992.94 shown as the last item in Schedule J of the Bank's account of proceedings after the deduction of $ 500. heretofore paid by it in compromise of a certain income tax liability.
Approval of this stipulation of settlement was recommended by a referee after hearings. He advised the court, in part, as follows:
As a result thereof, I have arrived at the conclusion that while certain of the objections appeared to be without merit, other objections might be proven meritorious based upon close questions of both fact and law. Counsel for the Federation Bank and Trust Company and John E. Varley, Trustee sedulously argued that such objections had no merit either in fact or law, contending that the settlement was being effected to avoid further extended litigation, the*261 expense of conducting the same and to relieve the active officers of the Bank from the necessity of spending a great deal of time in connection with this litigation. Said counsel contended, among other things, that the exculpatory clauses contained in the trust agreement dated September 30, 1932 * * * absolved the Trustee of liability except for its own gross negligence or wilful misconduct, neither of which existed, was proved or could be proven. * * * Said counsel further contended that if said Federation Bank and Trust Company *968 were surcharged in any substantial amount, they would advise an appeal from any such judgment.
On September 12, 1945, the State court entered its final judgment in the accounting proceedings approving in all respects the stipulation of settlement. The final judgment ratified, affirmed, and approved the acts, proceedings, and account of proceedings of the trustee and the petitioner. The judgment further ordered the petitioner to pay over to the trustee the sum of $ 195,000 in addition to $ 8,492.94 as stipulated, and upon payment thereof the trustee was ordered to execute and deliver general releases to the petitioner on behalf of the participation*262 certificate holders as provided in the stipulation of settlement. All money gathered and held by the trustee was to be distributed pro rata according to the trust agreement.
The judgment contained such further provisions as were necessary to carry into effect the terms of the stipulation of settlement. Pursuant to the terms of the judgment, petitioner on October 24, 1945, paid $ 195,000 to the trustee plus the $ 8,492.94 referred to in the stipulation of settlement. Of the $ 195,000 settlement, the petitioner was reimbursed in the amount of $ 70,000 by an impleaded officer of the petitioner, Jeremiah Maguire. For Federal tax purposes, petitioner gave no effect to this payment in its returns.
At all times pertinent hereto petitioner considered itself the owner of the assets it had agreed to liquidate. The final liquidation of a given asset was treated for Federal income tax purposes as a closed transaction and gain or loss was reported in the year of final disposition. Such gain or loss was computed by using the original cost basis of each asset as adjusted, but no adjustments were made on account of its transactions with the participation certificate holders. Petitioner did*263 not elect to reduce the bases of these assets under the provisions of any internal revenue laws and entered into no agreements with the Commissioner of Internal Revenue to do so.
During the calendar years 1943, 1944, and 1945 petitioner claimed losses of $ 90,919.15, $ 327,748.29, and $ 337,258.45, respectively. These losses were claimed as deductions on its income tax returns in each of the respective calendar years. The losses for 1943 and 1945 were disallowed in full. All of these losses were sustained as a result of the liquidation of assets petitioner had agreed to liquidate in the trust agreement.
OPINION.
We will make a short summary of some of the foregoing facts before proceeding with a discussion of the issues. Petitioner, a banking corporation, was taken over by the Superintendent of Banks of the State of New York in 1931. It was allowed *969 to reopen in 1932 after having submitted and having approved a plan of reorganization which involved the raising of new money and the reduction of deposit liability.
Reduction of deposit liability is the part of the reorganization in which our problem falls. Briefly, a majority of the depositors waived one-third of their*264 deposits amounting to $ 2,528,461.02. At the same time the petitioner gave such depositors participation certificates in an amount equal to the waived deposits which entitled the holders to certain rights under a trust agreement. Under this latter agreement the bank agreed to liquidate certain designated assets with a book value of $ 8,936,942.60 and the bank was to retain the first $ 5,530,036.25, plus 6 per cent interest, and the balance of the liquidation proceeds, up to the full amount of the waived deposit indebtedness, was to be turned over to a trustee for the benefit of the holders of the participation certificates. In 1942 the petitioner purchased the outstanding junior interest in the unliquidated assets for $ 534,125.08 and this sum was paid to the trustee and distributed pro rata to the participation certificate holders. In 1945 petitioner paid $ 125,000 (of the sum of $ 195,000) in settlement of a class action brought by the depositors against the trustee and petitioner charging mismanagement of the trust and improper accounting.
Respondent determined petitioner received income by reason of the depositors' waiving one-third of their deposits in 1932, and this income*265 was realized in 1945, in an amount of $ 1,818,566.49. Respondent arrived at the amount of income by taking the full amount of the waived deposits, or $ 2,528,461.02, and subtracting all of the sums paid to the depositors by petitioner in the total sum of $ 709,894.53. As shown in the statement of facts, the depositors received $ 42,276.51 derived from the trusteed stock, $ 8,492.94 income on certain assets in excess of 6 per cent, $ 534,125.08 paid in 1942 in settlement of the certificate holders' junior interest, and $ 125,000 paid by petitioner in 1945 (out of the $ 195,000) in settlement of the accounting action, or a total of $ 709,894.53.
Respondent states in his brief the question is "simply whether the petitioner realized taxable income from the cancellation of certain deposit indebtedness and, if so, the year such cancellation was effected for income tax purposes."
It has long been recognized that a debtor may realize taxable income within the meaning of section 22 (a) of the Internal Revenue Code of 1939 by the cancellation of a debt for less than the face amount thereof. United States v. Kirby Lumber Co., 284 U.S. 1">284 U.S. 1; Helvering v. American Chicle Co., 291 U.S. 426">291 U.S. 426.*266 If the debtor is insolvent when a debt is waived the amount of taxable income resulting therefrom cannot *970 exceed the amount by which he is rendered solvent. Lakeland Grocery Co., 36 B. T. A. 289; Texas Gas Distributing Co., 3 T.C. 57">3 T. C. 57.
Petitioner argues, if it realized any taxable income by reason of the depositors' executing the consents and assignments, it realized it in 1932 when the assignments of one-third of the deposits were executed and delivered, or at the latest 1942 when it settled with the depositors and their junior interest in the assets was extinguished.
Respondent argues no income was realized by the assignments of deposit indebtedness in 1932 because the bank gave the depositors participation certificates entitling them to a junior interest in the proceeds of the liquidation of certain designated assets, and not until those assets would be liquidated could it be determined the exact amount of the deposit liability waived. The argument goes on to contend the last payment to the deposit holders in final settlement of their junior interest in the designated assets was in 1945, in settlement of the*267 accounting action, and therefore that was the year in which the bank realized taxable income by reason of the waivers executed by the depositors in 1932.
We need not decide whether petitioner derived income from the forgiveness of debt in 1932 or in the years between 1932 and 1942. Our sole problem here is whether the petitioner realized income from the cancellation of the deposit indebtedness in 1945. We hold that if income did result to the petitioner by reason of the depositors' waiving one-third of their deposits in 1932, then the year 1942 would be the last year in which petitioner could have derived such income.
On May 21, 1941, some 9 years after the waiver of deposits, the petitioner offered to purchase the outstanding equity of the participation certificate holders for $ 534,125.08. The State court approved the offer and ordered payment of the agreed sum. In consideration therefor, the trustee was ordered to execute and did execute an assignment and release to the petitioner. This instrument, dated October 7, 1942, "assigned, transferred, delivered, and released" to the petitioner all right, title, and interest of the participation certificate holders in and to the junior*268 participating interest in the designated assets remaining in the hands of the petitioner. The instrument contained a provision whereby the release did not prejudice the rights of any interested party to an accounting.
We feel that the purchase in 1942 of an assignment and release of the right, title, and interest of the depositors in the designated assets determined the final amount, if any, of indebtedness forgiven. This purchase, and the order of the court approving the purchase, terminated all rights the holders had under the trust agreement and participation certificates except for an accounting. Any debt or liability to the participation certificate holders under the trust agreement was *971 completely extinguished by this purchase just as surely as a complete liquidation would have extinguished it. The participation certificate holders, subsequent to the assignment and release, could have had no standing in court to sue on the certificates, as the execution of the assignment and release extinguished the liability evidenced by the certificates.
As previously stated, respondent argues the payment in 1945 of $ 195,000 under the final decree in the accounting action was*269 the final payment in satisfaction of the petitioner's liability to its depositors under the original reorganization agreement. The argument is that it was not until this payment was made that the liability was extinguished and the full amount of the canceled deposit liability became income in that year. The argument of respondent that the payment in settlement of the accounting action was a final payment to the depositors under the original reorganization agreement fails to take into consideration the fact that the $ 195,000 was paid under a settlement stipulation which did not admit the validity of any of the claims made in the accounting action. The settlement of the suit merely admitted there was a dispute and a sum of money was paid to be rid of the controversy. Mutual Ben. Health & Accident Ass'n v. Crowder, 201 Miss. 92">201 Miss. 92, 28 So. 2d 654">28 So. 2d 654. The payment of the settlement sum, under such a stipulation, cannot be said to be a payment that was due. Cf. Laurence M. Marks, 27 T.C. 464">27 T. C. 464.
The stipulation of settlement of the accounting action recites it is entered into by both parties "in order to avoid*270 further litigation" and it is expressly stated therein it is "without any admission of liability on the part of" the bank or trustee. It provides for the withdrawal of "all objections heretofore filed against the accounts of proceedings of" the trustee and bank. The order of court approving the settlement approved the acts and proceedings and accounts of the bank and trustee.
Under this record we are convinced the bank's payment of a net of $ 125,000 in settlement of the accounting action in 1945 was not, as respondent argues, the final payment under the trust agreement. This was a settlement, in a suit for some 8 million dollars, which was based on allegations of mismanagement by the trustee and petitioner with reference to the assets on which the depositors had a junior interest. There was joined to the action the trustee's action seeking approval of his accounts and the petitioner, pursuant to court order, filed its accounting. All of the accounts of the petitioner and trustee were approved after the stipulated withdrawal of all objections thereto. The payment of the settlement sum was to settle the mismanagement charge, or to get rid of the litigation. Any payment in the*271 8-million-dollar lawsuit would not be a payment back by petitioner *972 of a portion of the deposit indebtedness waived in 1932. It would not be a payment in partial satisfaction of the depositors' junior lien against the designated assets. Under respondent's theory of the case the petitioner realized income from the cancellation of the deposit debts in 1932, in the last year that it made a payment to the depositors in extinguishment of their interest represented by the trust agreement, and in an amount that is the amount waived, less the sums paid by the bank to the depositors under the trust agreement. Without indicating that we are in complete agreement with respondent's theory, we hold the last payment was in 1942; that the settlement of the action in 1945 by payment of $ 125,000 was not the payment of any sum due under the trust agreement. Rather, it was a payment to get rid of litigation, with no admission the sum was a payment due under the trust agreement.
The second issue is whether the petitioner was entitled to take gains or losses in 1943, 1944, and 1945 in the sale or disposition of designated assets. The respondent disallowed such losses. This issue was resolved*272 by our holding heretofore that the executory nature of the reorganization plan was terminated in 1942. Since the petitioner purchased all outstanding equities in the remaining assets in 1942, it follows that any gains derived, or losses sustained, from the sale or disposition of its assets were the petitioner's and only the petitioner's.
The third issue concerns the bases of the assets sold or disposed of in 1943, 1944, and 1945. The respondent contends that they must be reduced as a result of the reorganization. The petitioner, on the other hand, argues that they should be increased as a result of the reorganization. It was stipulated that the adjusted bases of the assets were used at all times by the petitioner, but no adjustment was made because of the reorganization. The respondent argues that when the petitioner "repurchased" or "reacquired" certain assets in 1942 from the participation certificate holders the referee established a new basis by his evaluation of the remaining assets. We cannot agree to this proposition. First of all, legal title to the assets remained in the petitioner at all times. The petitioner, in 1942, merely purchased the outstanding equity of the*273 depositors in the proceeds of liquidation. This act did not alter the bases.
The argument of petitioner that there must be an increase of bases because of the payment in 1942 of $ 534,125.08 is likewise without merit. This payment was not a capital expense but the final payment in extinguishment of an encumbrance it had created against its assets.
The fourth issue is whether the petitioner is entitled to a deduction in 1945 for a net operating loss carryover from 1944. This issue was resolved in favor of petitioner by our holding that the petitioner could claim gains or losses in 1943, 1944, and 1945.
*973 The fifth issue is whether the petitioner was entitled to deduct as an ordinary and necessary expense, in 1945, the net sum of $ 125,000 paid during that year in settlement of certain legal proceedings. The respondent, of course, argues that this payment was petitioner's final payment of its liability to its former depositors. We have already resolved that question. Respondent also argues that the evidence fails to establish that the payment was proximately related to petitioner's business, *274 or that it was ordinary and necessary thereto within the meaning of section 23(a) of the 1939 Internal Revenue Code. Of course, the petitioner has the burden of proving both requirements.
Normally, one who regularly engages in the business of serving as a fiduciary and incurs and pays a liability growing out of the conduct of such business is entitled to deduct as a business expense the amount so paid. John Abbott, 38 B. T. A. 1290. Settlement of legal proceedings contesting an accounting by a fiduciary may be such an expense. Valentine E. Macy, Jr., 19 T.C. 409">19 T. C. 409.
The petitioner, a bank, was in the business of liquidating assets under a contract so to do. By the very nature of a bank's operation it serves as a fiduciary in handling trusts and estates. As such, its business is to gather, hold, invest, reinvest, and liquidate assets of the trusts and estates as the situation demands. In the instant case, the trust agreement imposed upon the petitioner the duty to liquidate and to account for the designated assets. It was by virtue of this liquidation and accounting that legal proceedings were instituted and a payment by petitioner made in settlement thereof. We feel that the payment was ordinary*275 and necessary within our holding in Great Island Holding Corporation, 5 T. C. 150, and Valentine E. Macy, Jr., supra.Here we have a compromise settlement of a bona fide claim charging petitioner with mismanagement in the liquidation of assets. In the stipulation of settlement, and the order of the State court approving the settlement, any fault or liability on the part of the petitioner was repeatedly denied by petitioner. We feel that according to the evidence before us, the petitioner paid its former depositors the net sum of $ 125,000 so as to prevent long, drawn-out litigation which was disrupting the normal business of the petitioner. Whether the deduction be termed an ordinary and necessary business expense or a loss incurred in petitioner's trade or business is of little importance, for the payment is obviously one or the other and the result is the same. Great Island Holding Corporation, supra;Laurence M. Marks, supra.
Decision will be entered under Rule 50.