The opinion of the court was delivered by: DUFFY
This action arises as a result of a dispute between the United States government and the co-executors of the estate of Walter Roy Manny. The government is seeking a judgment for unpaid estate taxes and interest of $ 1,023,486.51 plus statutory additions. Defendants contend that the bulk of this amount has been paid by virtue of the tender of 31/2% United States Treasury Bonds with a face amount of $ 775,000. The government, however, has rejected this tender on the grounds that the bonds were not owned by decedent at his death, and hence, were ineligible for redemption at par.
The parties have consented to a trial on stipulated facts to resolve the question whether the bonds were in fact owned by Walter Roy Manny at his death. A summary of these facts is essential to an understanding of the posture in which the case arises as well as the legal theories which the parties espouse.
On May 27, 1972 Walter Roy Manny suffered a mild stroke while vacationing in Woodstock, Vermont. He was eighty-one (81) years old at the time and was hospitalized in nearby Hanover, New Hampshire. During his confinement, Mr. Manny discussed with his son, defendant James C. Manny, the handling of his business and personal affairs. A year earlier Mr. Manny had executed a General Power of Attorney and Four Special Powers of Attorney appointing James C. Manny and H. E. Johnson, as his co-attorneys in fact.
At the suggestion of Mr. Johnson, an accountant and co-attorney in fact, James Manny discussed with his ailing father the advisability of purchasing United States Treasury Bonds, known as Flower Bonds
to be redeemed at par for the payment of any Federal estate taxes which might be assessed against his estate. Walter Roy Manny told his son to proceed with the purchase of the Bonds. He also concurred in the suggestion that Mr. Johnson review his portfolio and make recommendations regarding which of his securities should be sold to pay for the Bonds.
Thereafter, on June 6, 1972, Walter Roy Manny suffered a severe stroke and on June 9 he lapsed into a coma from which he was never to recover. While he was in this comatose state, on June 19, 1972, the disputed Bonds were purchased at the prevailing market place prices and paid for out of Walter Roy Manny's funds on deposit on his custodian account in the Bank of New York. Securities sold on June 20 and June 21, 1972 helped to cover the cost of the Bonds. Mr. Manny died on June 27, 1972.
The Bonds had a face amount of $ 775,000 and were bearer form. They carried the following legend on their face:
This bond, upon the death of the owner, will be redeemed at the option of the duly constituted representatives of the deceased owner's estate, at par and accrued interest, if it constitutes part of such estate and the proceeds are to be applied to the payment of federal estate taxes as in said Circular provided (referring to Treasury Department Circular 1052).
The Bonds had been issued on October 3, 1960 pursuant to Treasury Department Circular 1052. This Circular included the following pertinent terms and conditions:
Any bonds issued hereunder which upon the death of the owner constitute a part of his estate, will be redeemed at the option of the duly constituted representatives of the deceased owner's estate, at par and accrued interest to date of payment, Provided :
(a) that the bonds were actually owned by the decedent at the time of his death; and
(b) that the Secretary of the Treasury be authorized to apply the entire proceeds of redemption to the payment of Federal estate taxes.
On or about March 27, 1973, defendants filed an estate tax return showing the disputed Bonds as assets and reflecting a tax liability of $ 1,026,988.61. The estate paid this liability by tendering the Bonds, the interest accrued thereon ($ 9,890.88) and cash of $ 242,107.73.
The Bonds were redeemed at par and a total of $ 784,890.88, reflecting their face value plus accrued interest, was credited to the District Director of Internal Revenue, Manhattan, New York, in partial payment of the estate's Federal tax liability.
On or about September 29, 1973 an audit of the estate was commenced by the Internal Revenue Service ("IRS"). During the course of the audit, a question arose as to the eligibility of the Bonds for redemption in partial payment of the estate's Federal tax liability. In February, 1975, the matter was referred to the Department of the Treasury, Bureau of Public Debt. The commissioner of that bureau notified defendants that the Bonds had been erroneously redeemed since in his view Walter Roy Manny's agents lacked the requisite authority to make a binding purchase on his behalf. Mr. Manny's lack of mental capacity, ...