OPINION.
Pieece, Judge :
The first question for consideration is how the basis of the petitioner’s real estate was affected by its settlement of the Chancery Court proceeding, wherein the First National Bank of St. Louis, as a judgment creditor of Caldwell, had sought to partially annul and rescind Caldwell’s conveyances of such real estate, on the ground that the property had been transferred in fraud of creditors. Petitioner’s contention is that court costs and the $50,000 paid to the creditor in compromise of such proceeding, represented expenditures incurred in removing a cloud on its title; and that therefore it is entitled not only to capitalize these payments, but also to add the same to the cost basis for the property which would be allowable with respect to Caldwell’s conveyances if the same had been complete and unrescindable.
We think that such contention is unsound. It fails to recognize that the income tax consequences of the settlement of litigation must be determined with regard to the nature of the claim involved and the relationship of the parties to the controversy; that the “cloud” sought to be removed by the creditor’s bill was actually a challenge to the completeness and validity of Caldwell’s conveyances, upon which petitioner must rely to sustain its original basis; and that since the creditor had, and could have, no interest in the property except that which it obtained through and under Caldwell or his estate, petitioner did not possess, after the “cloud” had been removed and its dealings with Caldwell and his creditor had been completed, any other or greater interest in the property than Caldwell’s entire title, with respect to which petitioner’s basis had already been determined and allowed. The contention of petitioner fails also to give recognition to the fact that the parties defendant to the equity proceeding, which challenged the completeness and validity of Caldwell’s conveyances, included not only the petitioner but also Caldwell and all persons who had any legal or equitable interest in the shares of stock that had been delivered in consideration for the conveyances; and that, since Caldwell had acted not only as the conveyor but also as petitioner’s principal officer at the board of directors’ meeting where the purchase was authorized, and since the above-mentioned shareholders were donees of Caldwell, none of the defendants may be regarded as innocent purchasers for value.
The principle is now well established that the income tax consequences of compromises of litigation must, where the litigation has substance, be determined with regard to the nature of the claim involved and the relationship of the parties to the proceeding. In Lyeth v. Hoey, 305 U. S. 188, where a will contest was settled and the question was whether the amount paid to the contesting heirs should be regarded as a tax-free “inheritance,” or merely as ordinary income realized on a “bargaining position,” the Court said:
Petitioner was concededly an heir * * *. Save as heir he had no standing. * * *
It does not seem to be questioned that if the contest had been fought to a finish and petitioner had succeeded, the property which he would have received would have been exempt under the federal act. Nor is it questioned that if in any appropriate proceeding, instituted by him as heir, he had recovered judgment for a part of the estate, that part would have been acquired by inheritance within the meaning of the act. We think that the distinction sought to be made between acquisition through such a judgment and acquisition by a compromise agreement in lieu of such a judgment is too formal to be sound, * * *
We are not convinced by the argument that petitioner had but “the expectations” of an heir and realized on a “bargaining position”. * * *
In Helvering v. Safe Deposit & Trust Co. of Baltimore, Trustee, 316 U. S. 56, the Supreme Court again applied this principle, and quoted with approval its statement in the Lyeth case, that “the distinction sought to be made between acquisition through such a judgment and acquisition by a compromise agreement in lieu of such a judgment is too formal to be sound.”
Other applications of the same principle are to be found in the statute, and in cases decided both before and after the Lyeth case. For example, sums received in settlement of claims for personal injury are deemed exempt from tax in the same manner as if a judgment for personal injuries had been obtained (sec. 22 (b) (5), I. E. C. of 1939); whereas amounts received in settlement of claims for rent, royalties, or profits have been held to be taxable income, because of the nature of the claims involved (Hort v. Commissioner, 313 U. S. 28, 30-31; United States v. Safety Car Heating & Lighting Co., 297 U. S. 88; Swastika Oil & Gas Co. v. Commissioner, 123 F. 2d 382). And in other cases, where amounts were received in compromise of suits to recover interests in property alleged to have been wrongfully or fraudulently taken away, such amounts have been held to constitute either a return of capital or capital gain, as though the claimant had first recovered his property through the litigation, and then resold it to the opposing party for the amount of the settlement. Margery K. Megargel, 3 T. C. 328; Charles S. Davis, Trustee, 35 B. T. A. 1001.
The principle thus established gives recognition to the fact that settlements of litigation are favored; and that settlements would be discouraged if the taxpayers could not obtain through compromise the same income tax rights and benefits as would be allowable if the litigation were cai'ried to final judgment. It is only by treating compromises as fro tanto confessions of judgment that an orderly analysis of the tax results may be made.
Applying to the instant case the above-mentioned principle and the methods of analysis used in the Lyeth and Megargel cases, the situation revealed is as follows: The First National Bank of St. Louis was concededly a creditor of Caldwell; and save as such creditor who held rights through and under Caldwell, it had no standing. By virtue of that relationship and in enforcement of its rights, it sought to annul and rescind, in part, the conveyances of real estate which Caldwell had made to petitioner, on the ground that they were fraudulent and void. If the contest had been fought to a finish and the creditor had succeeded, part of the real estate would have been returned to Caldwell or his estate, without right of redemption in petitioner, to be applied in satisfaction of the judgment outstanding against Caldwell; and upon such restoration, any basis that might theretofore have attached to the property in petitioner’s hands would have been lost, for the basis could not exist apart from the property. And if, at this point, petitioner had elected to repurchase the lost property from Caldwell (or from his estate or his creditor), either by paying cash after the return of the property, or by the short-cut method of delivering cash in lieu of the property, then it would have acquired a new basis for the property so purchased, equal only to the amount then paid — not a double basis equal to its new cost plus the prior basis which had been lost. As in the case of one who has purchased stolen property and then been compelled or induced to restore it to the rightful owner, whatever basis the purchaser had tentatively acquired is wiped out by the rescission of the purchase; and the fact that he may thereafter make a new and valid purchase from the true owner, does not give him a basis of double amount. Whatever loss may be sustained through a rescission must not be confused with the basis of the property if a new or supplemental purchase is made. We hold that the same is true in the instant case, where the result was attained by compromise, rather than by judgment. Lyeth v. Hoey, supra.
The petitioner has not here shown, either through its pleadings or evidence, the amount of the basis allowed to it with respect to Caldwell’s conveyances in exchange for the shares of stock (designated by petitioner as “the base cost” of the real estate); but since it concedes that such basis was fixed by agreement of the parties in adjusting tax liabilities of prior years, we assume in the absence of evidence to the contrary that it was fixed in accordance with the statutory provisions that govern the basis of property acquired for stock, and that it reflected the amount which would be allowable under the statute if Caldwell’s conveyances had been complete and valid. We think petitioner is entitled to no more; for whether the property interests were acquired solely from Caldwell, or partly from Caldwell and partly from his creditor who retained a right in the property, petitioner did not acquire a greater title or become entitled to a greater basis than that which reflected the entire property.
This conclusion accords with the holding of the Court of Appeals for the Ninth Circuit in Murphy Oil Co. v. Burnet, 55 F. 2d 17. There, the taxpayer had paid $1,200,000 in settlement of a suit that sought to rescind its purchase of oil properties on the ground of fraud; and it, like the present petitioner, claimed the right to add such settlement payment to its cost basis for the properties, and thereby make possible increased depletion allowances. In denying the right to such addition, the court said:
Moreover, in fixing the tax of the petitioner it already had been given the benefit of the full market value of the property as of March 1, 1913, upon the theory that it owned the property at that time. The $1,200,000 therefore was not only not a proper deduction from the income because it was a capital expenditure but it should not be added to the capital in determining the depletable base, for that had already been fixed by the statute as a fair market value of the property on March 1, 1913, and this estimated value included the entire property, including, of course, the interest therein which was still owned by Domingo Bastanchury and which was in effect subsequently acquired by petitioner by the payment of the additional purchase money. * * *
We hold that the same is true here.
But there are still other reasons why petitioner’s claim to an increased basis for the property cannot be allowed. When the exchange of stock for real estate was authorized at the first meeting of petitioner’s board of directors, Caldwell participated on both sides of the transaction — on the one hand as the seller, and on the other hand both as president and as chairman of the directors (composed entirely of members of his family) who acted for petitioner as the purchaser. Caldwell then transferred the shares of stock, without consideration, to individual trustees for the benefit of members of his family; and shortly thereafter he was insolvent. By reason of this relationship of the parties, and Caldwell’s control over petitioner which is indicated by the entire record of this case, it must be assumed that the infirmities of Caldwell’s conveyances were known to the petitioner, and that the risk of the attack on these conveyances which followed was assumed at the time the stock was issued. As was said by the Supreme Court of Tennessee in Dale v. Thomas H. Temple Co., 186 Tenn. 69, 208 S. W. 2d 344, which is reviewed in connection with the second issue of the present case “it is clear that since the executive officers and directors of the Caldwell corporations were the same as the individual Caldwells, the design and intent of the corporation cannot be distinguished from the design and intent of the individual.” In such situation, the amount paid to the creditor represents nothing more than satisfaction of a liability impliedly or constructively assumed as a part of the original cost, for which an agreed basis has already been allowed.
Moreover, it cannot here be determined that petitioner is correct in its position that the payment to the creditor was solely for protection of its real estate, even though we have predicated our foregoing holding on the assumption that such position was correct. The equity suit was brought not only against petitioner but also against all trustees and beneficiaries who had interests in the shares of the stock which had been issued for the conveyances; and one of the creditor’s prayers for relief was that if the conveyances were not rescinded, then such stock should be attached and applied in satisfaction of the judgment. The compromise of the litigation was in reality a general settlement of all claims involved, and it benefited all of the numerous parties defendant. To the extent that the settlement payment removed the challenge to the stock, it represented not only a satisfaction of Caldwell’s indebtedness but also a distribution or return of capital for the benefit of petitioner’s stockholders; and no basis adjustment is proper. The courts have held that where amounts have been paid under a general settlement, they will not, in the absence of other evidence, be related to any particular claim. Raytheon Production Corporation, 1 T. C. 952, affd. 144 F. 2d 110, certiorari denied 323 U. S. 779.
Since the money paid in settlement of the litigation is not a proper addition to petitioner’s basis for its real estate, neither are the costs of the litigation nor the expense of the title guaranty policy (which in any event was only an expense of borrowing money). We therefore approve the Commissioner’s determinations with respect to the first issue.
Second Issue. The second question presented is whether petitioner is entitled to deduct, either as a loss or as an ordinary and necessary expense of its business, the sum of $123,116.81 which it contributed toward satisfaction of the judgment obtained by the receiver of the Apex corporation against it and several other defendants; and also whether it may likewise deduct as a business expense, the $1,500 which it paid to an attorney in connection with settling a dispute among the several defendants as to the amount each should contribute toward payment of the judgment.
It is our opinion that the answer to these questions must depend primarily on whether or not the liabilities, which were satisfied, arose out of and were incident to the normal and ordinary conduct of petitioner’s business. The character and amounts of those liabilities are disclosed in the opinion of the Supreme Court of Tennessee (Dale v. Thomas H. Temple Co., supra), pursuant to which the judgment was entered, to have been as follows:
$73, 718. 05 against all the members of the Caldwell group including the present petitioner, and also against all except two members of the Potter group, for monies fraudulently taken from Apex and diverted to the Potters in payment for the controlling stock interest in Apex which certain members of the Caldwell group had purchased.
$45, 000.00 against all the same defendants, for liability in connection with an account owed to Apex by a corporation controlled by the Caldwells, which the several defendants had, through fraud and conspiracy, caused to be cancelled.
$65, 773. 05 against all members of the Caldwell group, for liability in connection with purported salaries fraudulently withdrawn from Apex by the individual Caldwells during the operation of Apex. The Supreme Court of Tennessee approved the findings of the lower courts that “the only service that the Caldwells rendered Apex was the wrecking of that corporation by misappropriation of its corporate assets for their personal benefit.”
$4,440.00 against all members of both the Caldwell and Potter groups, for liability in connection with rents fraudulently paid out of Apex and diverted to pay attorney’s fees owed by certain of the Caldwells.
6% interest on the above judgments from accrual of the cause of action, rather than the normal 3% interest, because such judgments stemmed from fraud.
There is no evidence in the instant proceeding which shows, or even tends to show, that any of the transactions from which such liabilities arose were in any way related to petitioner’s normal and legitimate business operations; or that they had any business purpose relating to such operations. Petitioner relies rather on argument: That all transactions of a corporation must be deemed to be “business transactions”; that except in the case of penalties imposed for offenses against the Government, all liabilities determined against a corporation in civil actions for fraud and conspiracy must be regarded as liabilities for “business tort”; and that payments made in discharge of such liabilities are deductible for income tax purposes as losses or as ordinary and necessary business expenses. We do not agree.
Section 23 of the Internal Eevenue Code (1939) provides, in sub-paragraph (a) (1) thereof, for the deduction of “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”; and in subparagraph (f) thereof, it provides for deduction by a corporation of “losses sustained during the taxable year and not compensated for by insurance or otherwise.” The legislative history of these provisions, and also the opinions of the courts, indicate clearly that the benefits of the deductions thus provided are available only when the particular expense or loss is incurred in connection with transactions that are pertinent to the conduct of the taxpayer’s business.
As regards the legislative history, it is to be observed that, shortly after the adoption of the Sixteenth Amendment when section II of the Act of October 3, 1913, was in the process of being adopted, Congressman Hull, a member of the Ways and Means Committee, in explaining the counterpart of the above-mentioned section 23 (f), said (50 Cong. Eec., p. 506) :
As to losses, these provisions primarily contemplate allowance for losses groio-ing out of the trade or business from which the taxable income is derived, and generally termed trade losses, as distinguished from losses of capital or principal or losses incurred entirely apart from business transactions from which income is derived. A similar rule governs deductions for expenses. [Emphasis supplied.]
In Kornhauser v. United States, 276 U. S. 145, which is one of the earlier and most frequently cited cases on this subject, the Supreme Court, after reviewing the holdings in several cases including one which involved a corporation, said:
The basis of these holdings seems to he that where a suit or action against a taxpayer is directly connected with, or, as otherwise stated * * *, proximately resulted from, his business, the expense incurred is a business expense * * * [Emphasis supplied.]
Deputy v. DuPont, 308 U. S. 488, is another much cited case on this subject. There the Court stated:
One of the extremely relevant circumstances is the nature and scope of the particular business out of which the expense in question accrued. The fact that obligation to pay has arisen is not sufficient. It is the kind of transaction out of which the obligation arose and its normalcy in the particular business which are crucial and controlling. [Emphasis supplied.]
Hales-Mullaly, Inc., 46 B. T. A. 25 (1942), affd. (C. A. 10) 131 F. 2d 509, involved facts and issues very similar to those here present. There the taxpayer corporation and certain individuals,'including all but one of its incorporators, directors, and officers, were made defendants in a tort action filed by another corporation in which it was charged that said incorporators, officers, and directors had conspired to ruin the other corporation’s business, had acquired by fraudulent means the other corporation’s wholesale department, goodwill, and franchises, and had thereafter used the taxpayer corporation as an instrumentality to operate and hold the same. This suit was settled under an arrangement whereby the taxpayer corporation, without participation by the other defendants, paid $16,585.33 in discharge of certain obligations of the other corporation, plus $35,202.75 for attorneys’ fees and expenses incurred in connection with the litigation. The Board of Tax Appeals, in denying the taxpayer corporation’s right to deduct such amounts as ordinary and necessary expenses of its business, said:
It is unnecessary to pass upon each of petitioner’s contentions. Suffice it to point out “the fact an obligation to pay has arisen is not sufficient.” Deputy v. duPont, supra. The transaction which gives rise to it must be of common or frequent occurrence in the type of business involved, Welch v. Selvering, supra— “normal, usual or customary” — “and its normalcy in the particular business” is “crucial and controlling.” Deputy v. duPont, supra. If petitioner had been sued upon an account, or for damages sustained through the negligent operation of one of its delivery trucks, for example, there would be but slight question of normalcy; but it is far from “normal, usual or customary” for a mercantile corporation to be sued for acts committed by its incorporators prior to its organization. Moreover, we think it is also material, and incumbent upon petitioner to show, that the suit resulted, at least in part, from some action of the corporation either in, or incidental to, its ordinary business. Cf. Wolf Manufacturing Co., 10 B. T. A. 1161; W. S. Dickason, 20 B. T. A. 496. No such showing, however, has been made. Petitioner’s contention that expenditures made by a mercantile business in defending a suit for damages on account of any kind of a transaction is clearly contrary to the decisions, especially Deputy v. duPont. This case is controlling and, since, in our judgment, petitioner has failed to prove that the expenditures were “ordinary”, respondent’s determination must be upheld.
The Hales-Mullaly case was followed by this Court in Levitt & Sons, Inc., 5 T. C. 913, 929 (1945), affd. (C. A. 2, 1947) 160 F. 2d 209; and the Tenth Circuit’s opinion affirming it has been cited with approval in Boulder Building Corporation v. United States, (W. D., Okla., 1954) 125 F. Supp. 512 at footnote 8; and Knight-Campbell Music Co. v. Commissioner, (C. A. 10, 1946) 155 F. 2d 837. It is to be observed also that the Tenth Circuit, in its opinion, further held the expenses involved did not qualify as a loss under section 23 (f) of the Code, for it said (131 F. 2d 509, 512):
It suffices to say without elaboration that expenditures made in the compromise of litigation and for attorneys fees and other expenses in connection with the litigation do not come within the ambit of that section. Kornhauser v. United States, supra.
The petitioner has indicated that it relies upon Helvering v. Hampton, 79 F. 2d 358, and Commissioner v. Heininger, 320 U. S. 467. Those cases, however, are distinguishable on their facts; for there the liabilities were for irregularities in handling a lease and in conducting a sale, respectively, which were incident to the normal business operations of the taxpayer.
Although it may be difficult, in certain circumstances, to determine whether a particular loss or expense has been incurred in the normal and legitimate operations of a business, no such difficulty exists here. The petitioner has conceded that it derived no business benefit whatever from the fraudulent conspiracies for which it and the other defendants were held liable; and the entire opinion of the Supreme Court of Tennessee under which the judgments were entered, leaves no doubt that the transactions from which the present liabilities stemmed had no normal or proper relationship to petitioner’s normal and legitimate business operations.
We hold that the amount contributed by petitioner toward satisfaction of the judgment in the Apex case is not deductible under either section 23 (a) (1) (A) or section 23 (f) ; and we also hold, for similar reasons, that the attorney’s fees incurred in settling the dispute among the several defendants as to the amount each should pay toward satisfaction of the judgment, are not deductible. By reason of these holdings, it is unnecessary to pass on the question of whether, if said amounts were deductible, they would create a “net operating loss” within the meaning of section 122, with carry-overs to subsequent taxable years.
Third Issue. The third issue is whether the respondent erred in computing petitioner’s gain from the sale in 1947 of shares of stock of Nashville Union Stock Yards, Inc., by use of a zero basis. We think that, in the unusual circumstances here present, the employment of such basis was proper.
It is conceded that petitioner acquired the shares from the wife of James E. Caldwell without delivery of any consideration; and, since the petitioner has abandoned its claim to any loss, we are concerned only with the basis for determining its gain, if any. Such basis is controlled by section 113 (a) (2) of the Internal Revenue Code of 1939 which, so far as here pertinent, provides as follows:
(2) Gifts after December 81, 1920. — If tbe property was acquired by gift after December 31, 1920, tbe basis shall be tbe same as it would be in tbe bands of tbe donor or tbe last preceding owner by whom it was not acquired by gift * * *. If tbe facts necessary to determine the basis in tbe bands of the donor or the last preceding owner are unknown to tbe donee, tbe Commissioner shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, tbe basis in tbe hands of such donor or last preceding owner shall be the fair market value of such property as found by tbe Commissioner as of the date or approximate date at which, according to tbe best information that the Commissioner is able to obtain, such property was acquired by such donor or last preceding owner.
Here, the parties have stipulated that there are no records in existence with respect to any price that may have been paid for the stock, either by Mrs. Caldwell or by her husband. The evidence further reveals that the donor, Mrs. Caldwell, is deceased; and that, even after diligent search by an officer of petitioner and also by an officer of the corporation that issued the stock, it cannot be determined how or when she acquired the shares, or who was the last preceding owner by whom they were not acquired by gift. It is obvious that, in the absence of any evidence as to when such preceding owner acquired the shares (which may have been at any time subsequent to the incorporation of the issuer in 1919), it is impossible to determine fair market value as of such unknown date. Thus we have here not only a total absence of evidence from which to determine basis under the above statute, but also conceded inability to assemble any such evidence.
Burnet v. Houston, 283 U. S. 223, involved a similar situation where the taxpayer was unable to obtain evidence with which to meet the provisions of the statute that controlled the basis. There the court said:
The impossibility of proving a material fact upon which the right to relief depends simply leaves the claimant upon whom the burden rests with an unenforceable claim, a misfortune to be borne by him, as it must be borne in other eases, as the result of a failure of proof. * * *
To the same effect see Elsie SoRelle, 22 T. C. 459, 471; Lime Cola Co., 22 T. C. 593, 601.
The petitioner has suggested that the use of a zero basis is arbitrary; that under the above-quoted statute respondent had a duty to determine fair market value; and that therefore, the misfortune resulting from the inability to obtain evidence, must fall on him rather than the petitioner. We do not agree. If respondent’s determination may be termed “arbitrary,” it was not capricious, and did not result from any disregard of evidence. If he had determined any other basis for the shares, it indeed would have been both arbitrary and capricious, and could not have been supported. The law does not expect, or require, anyone to do the impossible. Since neither petitioner nor this Court has found it possible to determine any positive basis under the statute, the respondent cannot properly be charged with dereliction for not doing better.
Also the provisions of section 113 (a) (2) pertaining to basis do not purport to, and do not, control the burden of proof in proceedings before this Court. A taxpayer cannot establish error in a determination of the Commissioner as to basis, where he presents no eyidence whatever to establish a different basis.
In arriving at our decision on this issue, we have considered Helvering v. Taylor, 293 U. S. 507, and Cohan v. Commissioner, 39 F. 2d 540, and have concluded that neither is here applicable. In the Taylor case, it was held that, where the taxpayer had shown the Commissioner’s determination to be without rational foundation, arbitrary, and excessive, the case should be remanded for further hearing, notwithstanding that the taxpayer had not established what the tax would be under the correct theory; but here it has not been shown that the Commissioner’s determination was erroneous, and even a further hearing would not make possible the determination of any basis other than that which he used. In the Oohan case, it was held that where the taxpayer had incurred substantial expense for entertainment and travel in connection with his business but the amounts could not be definitely ascertained, then the' deductions allowable for such items should be estimated from such evidence as could be assembled; but here we must determine the cost or other statutory basis of stock in the hands of some unknown and unascer-tainable person who had not acquired it by gift, or the fair market value of the stock on the unknown and unknowable date when such unknown and unascertainable person acquired it. In this circumstance Burnet v. Houston, supra, controls; and we approve the Commissioner’s determination.
Reviewed by the Court.
Decision will he entered for the respondent.
Van Fossan, /., dissents.