United States v. Manny

• Decision Date: 06 December 1978
• Docket Number: No. 76 Civ. 5082 (KTD).,76 Civ. 5082 (KTD).
• Citation: 463 F. Supp. 444
• Parties: UNITED STATES of America, Plaintiff, v. James C. MANNY et al., Defendants.
• Court: U.S. District Court — Southern District of New York

463 F. Supp. 444

UNITED STATES of America, Plaintiff, v. James C. MANNY et al., Defendants.

No. 76 Civ. 5082 (KTD).

United States District Court, S. D. New York.

December 6, 1978.

Robert B. Fiske, Jr., U. S. Atty., S. D. N. Y., New York City, for the United States; William G. Ballaine, Asst. U. S. Atty., New York City, of counsel.

Windels, Marx, Davies & Ives, New York City, for defendants; Kenneth W. Greenawalt, Robert D. Taisey, New York City, of counsel.

OPINION

KEVIN THOMAS DUFFY, District Judge:

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 3½% 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 Bonds¹ 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, it was explained, vitiated the power of his attorneys-in-fact and, accordingly, Mr. Manny was not the "actual owner" of the Bonds at the time of his death.

The estate sought review of this determination from the Fiscal Assistant Secretary to the Department of Treasury. The Fiscal Assistant Secretary affirmed the decision of the Bureau of Public Debt and on February 6, 1976, the estate was formally advised of the government's decision to rescind the earlier redemption of the Bonds. The government offered to return the Bonds and also issued a check to the estate for $81,375 representing three years' interest thereon. The estate refused the proffer of the Bonds and returned the check, insisting that the Bonds were eligible for redemption.

In December, 1975, before the government had reversed its prior redemption of the Bonds, the IRS filed a claim in Surrogate's Court where the estate was being probated. The IRS asserted two estimated claims for estate taxes, one for $775,000 and one for $15,000.² On March 29, 1976, after the estate tax audit was completed, the IRS issued a statutory notice of deficiency to the estate in the amount of $195,311.63.³ The attachment to the notice disclosed that the IRS had accepted the estate's valuation of the Bonds at par for estate tax purposes but noted that this was done

solely for protective purposes in the event it is determined that the refusal of the Bureau of the Public Debt to redeem the bonds at face value in payment of your estate tax liability was incorrect.

In the event it is finally determined that the Bureau of the Public Debt action was correct, and the Treasury bonds are ineligible for payment of taxes, then, to the extent permitted by Internal Revenue Code of 1954, Section 6512(a), the estate tax liability will be reduced accordingly.

The estate filed a petition in Surrogate's Court on May, 1976, in an effort to resolve both the redemption issue and the tax deficiency. Following discussions with the government, the estate agreed to withdraw the proceeding in Surrogate's Court and thus, enable the United States to commence the instant action. The only issue before me at this time is the question of the eligibility of the Bonds for redemption at par for Federal estate tax purposes. All concede that if decedent was the owner of the bonds at his death, then they are so eligible.

The government takes the position that federal law governs the eligibility of the Bonds for redemption at par. This reliance on federal law is an apparent shift from the position earlier taken by the Bureau of Public Debt. In his letter to the estate, the commissioner of that bureau indicated that under applicable New York law, an agent's authority to act on behalf of his principal is terminated when that principal falls into a comatose state. Exhibits 15 and 16. The government now contends that federal law should control, since "the rights and duties of the United States on commercial paper which it issues" are governed by federal rather than local law. Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943).

The question before me is basically one of agency law. In setting out what it considers to be the federal principles of agency law governing the eligibility of the bonds for redemption, the government relies upon the Restatement of Agency, New York cases (In re Berry's Estate, 69 Misc.2d 397, 329 N.Y.S.2d 915 (Sur.Ct.1972); Merritt v. Merritt, 27 App.Div. 208, 50 N.Y.S. 604 (1st Dep't 1898)); one New Jersey case (Foster v. Reiss, 18 N.J. 41, 112 A.2d 553 (1955)) and one tax court case applying New York law (Estate of John Dierks, 40 T.C. 539 (1963)). It is thus, apparent that there is no true Federal rule, see Estate of Pfohl, 70 T.C. 630 (August 7, 1978). Moreover, the general principles of law propounded by the government are not inconsistent with New York law and thus, I conclude, as did the tax court in Pfohl, that whether the applicable standard be federal or local, the result is the same.

It is a general principle of agency law that an agent's authority is coterminous with that of his principal and "thus there is no authority unless the principal has the capacity to enter into the legal relations sought to be created by the agent." Restatement of Agency (Second), hereinafter Restatement § 7, Comment a. As do most general rules, this basic principle has its exceptions. Restatement § 122 recognizes such an exception in the case of brief periods of insanity caused by mental or physical illness. Id. comment d. Thus, while a judicial declaration that the principal is insane clearly terminates the authority of his agent, "the agent of one who becomes mentally incompetent to act on his own account . . . does not necessarily lose...