C182 pilot reported a nav/com radio failure creating smoke in the cockpit. Upon inspection the unit was removed from the aircraft and replaced with a working unit.

Narrative

I borrowed a friend's C182; to help another pilot drop off his aircraft for maintenance at ZZZ; about 120nm NW of the ZZZ1; departure airport. Although I have flown right seat CFI +/-50 hours in this aircraft; I had not flown solo from the left seat since new avionics were installed. When I turned on the Avionics master switch just after engine start; I noticed the transponder did not come on. I manually turned the transponder ON prior to taxi & set the ZZZ1 VFR departure code for ZZZ1 XXXX. Later after run-up I rechecked the transponder as part of the pre-takeoff checklist. There were many aircraft waiting for departure southbound on Runway XX. Tower cleared a 172 for take-off ahead of me; then cleared me to take off for VFR westbound routing within about 1 minute later. On initial climb; I was surprised that I was quickly overtaking the C172 ahead. We were both at about 1;300 feet. I reduced power just as Tower called to confirm I had the aircraft in sight. My ADSB Traffic warning turned the aircraft ahead red; same altitude; and announced a verbal warning. Although this aircraft does not have a formal TCAS system; some of the jets I have flown do have TCAS; and as a standard procedure; I long ago decided to treat ADSB 'red' warnings with verbal alerts should be treated the same as a TCAS RA. I could not turn right; westbound because of other traffic so I pitched up to simultaneously slow down and climb slightly to provide safe separation. I quickly leveled off just below the Bravo ceiling above ZZZ1 area. Within maybe 15 seconds I saw a good pathway to the right (westbound) and turned right; then descended to 1;200-1;300 ft. and proceeded Westbound with no further traffic issues.As I proceeded at westbound below the class Bravo and as standard VFR departure from ZZZ1 for the area; and about +/- 6 miles West of ZZZ1; the #2 Nav Com blinked; quit and emitted a brief puff of smoke. I found and pulled its circuit breaker and reviewed the rest of the panel and systems to see if there was a fire hazard. I set the original frequencies in the Number1 Comm and noticed ZZZ1 Tower calling me even though I was now outside of their airspace to the west. I answered and they did not hear me. I pushed the autopilot disable button; but the button fell off the yoke and disappeared on the floor. I disabled the autopilot manually; then turned further northeast-bound thinking my antenna might be better oriented for them to hear me. They called twice more and did not hear my replies. I checked and reset the Audio panel to transmit on Comm1; called them; and they responded. They advised me that they were calling on behalf of ZZZ1 approach and that my transponder was not squawking Altitude. I reviewed the Transponder; saw that it was still set to XXXX and was blinking its 'reply' light -- I pushed the altitude button. A few seconds later ZZZ1 Tower called to tell me that I was now squawking Altitude. A few minutes later while outside of the ZZZ1 Maneuvering Area and well west of the ZZZ1; the ZZZ1 Tower Controller called again and asked what squawk code I was using. I looked and saw that the transponder was still using XXXX and was still in Altitude mode. While I was responding to the Controller; I assumed that the Controller; knowing that I was well outside of the ZZZ1 and also well outside of Bravo airspace; was indirectly hinting that I should switch back to normal VFR code; so I pushed the VFR button. Instead; he suggested I should still be on XXXX; so within 20 seconds; I switched back to that. in less than a minute; the Controller called again; said I was well outside of the ZZZ1 and should be squawking 1200. I did and did not hear further from any ATC. Upon landing; I had a local avionics shop check the #2 NavCom. The technician applied a tag marked 'condemn' to the unit. He supplied a used unit of the same model from his inventory. On installation ops check was good; and he provided a logbook entry for the replaced unit. At no time was a mid air collision a real risk (I had the other aircraft in sight the entire time and we were proceeding same direction; so closure rate was not high); but I did feel artificially constrained in solving the conflict because of the ZZZ1 airspace and class Bravo potential airspace around and above me. If I had an official TCAS; I would have felt more comfortable because the rules are clear that the RA takes precedence over other airspace rules; but with typical GA aircraft equipment; the rules seemed less clear to me in the heat of the moment and I spent inappropriate time worrying about violating airspace when i should have had 100% focus on trying to avoid a collision. It is not common to have multiple failures (Com2; Autopilot red disable button) in the same phase of flight; but by themselves they were manageable. The insistent multiple calls by ZZZ1 Tower to relay messages from ZZZ1 Approach about transponder settings; while trying to work through the aircraft failures added unnecessary confusion; and had the aircraft failures been worse; the communications and relayed (and confusing) ATC demands could have driven a challenging situation to something much worse.