Consolidated appeals by the United States from judgments of the United States District Court for the Southern District of New York (Hon. Kevin Thomas Duffy, U.S.D.J. in the Manny case, and Hon. William C. Conner, U.S.D.J. in the Stanley case) which denied claims to recover claimed unpaid federal estate taxes. At issue was whether Treasury Bonds purchased by attorneys-in-fact for principals who later died, bought while decedents were living but comatose, could be tendered at par in payment of federal estate taxes. The district court held that they could be so tendered. Affirmed.
Before Mansfield and Newman, Circuit Judges, and Brieant, District Judge.*fn*
In these cases, consolidated for appeal, the United States sued in the district court to reduce to judgment and collect unpaid federal estate taxes assessed against the respective estates of Walter Roy Manny, deceased, and James G. Timolat, Jr., deceased. The estate representatives had tendered certain U.S. Treasury bonds, known popularly as "flower bonds," sold under provisions which allow their use at par for the payment of estate taxes.*fn1 Although the bonds had been accepted, upon further investigation, the Internal Revenue Service ("IRS") assessed a deficiency in each estate and offered to return the bonds.
At issue is whether the flower bonds, purchased in bearer form from third parties, paid for and delivered, but acquired while Manny and Timolat were comatose, through the agency of persons holding powers of attorney to trade in securities, are eligible for redemption at par in payment of federal estate taxes. The district court, 463 F. Supp. 444, held in each case that the bonds were eligible. We affirm.
A brief reference to the facts of the Manny case will be sufficient as there is no material factual difference between the two cases. According to the stipulated facts on which the case was tried below, Walter Roy Manny (the "decedent"), at all times a New York resident, had appointed his son and his accountant, H. E. Johnson, as his attorneys-in-fact, pursuant to several written instruments executed in 1971 and delivered in New York, which gave them the broadest possible agency powers with respect to his substantial assets and property, including the discretionary power to buy and sell securities.
On May 27, 1972, at the age of 81, while sojourning in Vermont, decedent suffered a slight stroke. The son visited his father a number of times, and it is stipulated that prior to June 6, 1972, at the suggestion of accountant Johnson, decedent's son recommended the purchase of flower bonds, and decedent, already aware of the advantages of such investments to the moribund, authorized his attorneys in fact to purchase such bonds through the Bank of New York, and authorized the sale of his securities to cover the purchase, as Mr. Johnson might recommend.*fn2 On June 6, 1972 decedent suffered a second stroke, stipulated to have been "massive," following which he remained in a comatose condition until his death on June 27, 1972.*fn3
Aware that their principal was comatose, the son and Johnson, acting under the powers of attorney, on June 19, 1972 caused the Bank of New York to purchase in the open market in New York, from unknown third parties, $775,000. face amount of United States Treasury Bonds, 3 1/2 due November 15, 1998, which had been issued in bearer form on October 3, 1960. The bonds were paid for and delivered to decedent's account at The Bank of New York on that date.
These bonds, and related series of flower bonds, 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.)
Treasury Department Circular 1052 provides in relevant part:
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.
The flower bonds were included in the estate and were submitted for redemption at par and credited towards the estate tax due. Thereafter, following audit and examination of the estate tax return, the Government determined that the flower bonds could not be used at par to satisfy the tax because it found that on the date of the purchase of the bonds, decedent was "in a comatose condition" which "would ...