36. California Superior Court ruling in Foreign Ministry of the Kingdom of Denmark v. Los Angeles (August 18, 2004)

Tentative Rulings

Case Number: SC079161 Hearing Date: Wednesday, August l8, 2004 Dept: B

Plaintiff Foreign Ministry of Kingdom of Denmark and Cross-defendants Wolfgang Petersen and Maria Petersen's motion for summary judgment is granted. Defendants and Cross-complainants City of Los Angeles and County of LOS Angeles' summary judgment motion is denied. The material facts are not in dispute, and Plaintiff and Cross-defendants are entitled to judgment as a matter of law.

Plaintiff Foreign Ministry of the Kingdom of Denmark seeks a refund of $56,800 in City transfer taxes and documentary transfer taxes. Plaintiff contends that it purchased real property in the city of LA in 1988 as a consular residence and sold that property in 2002 to the Petersen Trust. Pursuant to the terms of the sales agreement, the plaintiff assumed responsibility for the payment of the transfer taxes and was charged and paid a real property transfer tax of $47,250 (by City) and a documentary transfer tax of $11,550 (by County). Plaintiff made administrative claims seeking a refund of such taxes on the grounds that the transaction was tax-exempt under the Vienna Treaty, but those claims were denied. This action followed, Defendants City and County of LA answered and cross-complained against Plaintiff and Wolfgang Petersen and Maria Petersen, as trustees of the W/M Petersen Living Trust, the buyer of Plaintiff's property, contending that either Plaintiff or Petersen Trust is liable for the tax.

In asserting that the plaintiff is exempt from the documentary and property transfer taxes, plaintiff relies on Section 32 of the Vienna Convention on Consular Relations and Optional Protocols dated April 24, 1963, which provides as follows:

Consular Premises and the residence of the career head of consular post of which the sending state or any person acting on its behalf is the owner or lessee shall be exempt from all national, regional, or municipal dues and taxes whatsoever, other then such as represent payment for specific services rendered.

Defendants claim that Article 32(2) requires the Petersen's to pay the transfer taxes and that plaintiff cannot contractually assume the Petersen's liability and then seek an exemption. Subsection (2) reads as follows;

The exemption from taxation referred to in paragraph 1 of this Article shall not apply to such dues and taxes if, under the law of the receiving State, they are payable by the person who contracted with the Sending State or with the person acting on its behalf.

Defendants assessed the transfer taxes pursuant to the state, county, and city transfer tax statutes, which tax the deed, instrument or writing and impose the tax liability on the person who makes, signs, or issues the instrument, or for whose use or benefit the instrument is made. Rev. & Tax. Code §§ 11911, 11912; LACC §§ 4.60.030; LAMC § 21.9.2, 21.9.3. Plaintiff, as the maker of the deeds, and the Petersen Trust, for whose benefit the deed is made, are both subject to imposition of the transfer tax under the municipal statutes. However, plaintiff would be exempt from payment under Article 32 as the property was undisputedly the consular residence. Defendants argue that the Petersen Trust nonetheless remains subject to tax liability under the City and County laws and the plaintiff cannot by contract exempt the Petersen.

In interpreting a treaty, its plain meaning controls unless such meaning effects a result inconsistent with the intent or expectations of its signatories. Chan v. Korean Airlines, Ltd. (1989) 490 U.S. 122, 135 n 5; in re Hogan (1986) 187 Cal.App.3d 819, 823. The Vienna Convention on the Law of Treaties (which is recognized by the US as a codification of customary international law although it has not been adopted by the US) is in accord and states that "a treaty shall be interpreted in good faith accordance with the ordinary meaning to be given the terms of the treaty in their context and in the light of its object and purpose." Id. Art. 31. (Ex.6 to Ds' Non-CA Authorities.) According to Sutherland on Statutory Construction, the treaty's literal meaning controls, end "[e]ven if the text is unclear, the most natural meaning can be contradicted only by clear drafting history." Sutherland Statutory Construction (6th ed. 2002) § 32.9, pp. 761-762 (Ex. 3 to Ds' app, of non-CA authorities). The Supremacy clause requires adherence to federal construction of the international law. United States v. Curtis-Wright Corp. (1935) 299 U.S. 304.

"In choosing between conflicting interpretations of a treaty obligation, a narrow and restricted construction is to be avoided as not consonant with the principles deemed controlling in the interpretation of international agreements. Considerations which should govern the diplomatic relations between nations, and the good faith of treaties, as well, require that their obligations should be liberally construed so as to effect the apparent intention of the parties to secure equality and reciprocity between them. For that reason if a treaty fairly admits of two constructions, one restricting the rights which may be claimed under and the other enlarging it, the more liberal construction is to be performed." United States v. County of Arlington (1983) 702 F.2d 485, 488, n. 8. In resolving doubts the construction of a treaty by the political department of the government, while not conclusive upon courts called -upon to construe it, is nevertheless of weight." Id at 488,n.5.

The object and purpose of the Vienna Treaty of 1963 is apparent from its introductory language;

“Having in mind the Purposes and Principles of the Charter of the United Nations concerning the sovereign equality of States, the maintenance of international peace and security and the promotion of friendly relations among nations, ...[we] have agreed as follows:...". As a starting point, this court mist assume that inclusion of Article 32, which exempts consular property of foreign governments from local taxation, was intended to advance the treaty's stated purpose, i.e., international comity and regard for another State's sovereignty. In addition, the Courts have

recognized the practical reality behind such exemptions. Generally, "it would be difficult if not impossible to enforce the collection of any tax levied against a friendly foreign government if the latter were not disposed to pay it.” Republic of Argentina v. City of New York (1969) 25 N.Y.2d 252, 261. Concededly, here, enforcement is not an issue, as the deeds cannot be recorded until the transfer taxes are paid. The municipality holds all of the cards. However, the principles of comity and sovereignty support a "more fundamental reason which prevents a municipality from levying a tax on the property of a foreign nation using it in its governmental capacity. The same respect for the `perfect equality and absolute independence of sovereigns' (Citations omitted), which exempts a nation and its property from the interference of another state's judicial process, also demands that it be immune from any obligation to support the functioning of another government through the payment of taxes." id at 263. An exaction of taxes presupposes superior political authority "and there is a general acceptance of the view that such tribute is not exigible, consistently with the principles of the law of nations." id at 263 (citations omitted). To require, as defendants argue here, the non-exempt purchaser of the foreign state's property to pay the transfer tax is analogous to the imposition of a lien on the property, which indirectly attempts to enforce the law of the municipality over the property of the foreign state. See id at 262. Both methods of enforcing the tax adversely affect the price of the property and interfere with the foreign state's property. The foreign state is hampered in the sale of its property in that the requisite transfer documents cannot be recorded until the tax is paid. The payment of the transfer tax, in the case of a $10 million dollar property, is not an insignificant sum and clearly encumbers the sale price.

Yet, defendants point to subsection (2) as authority for allowing the municipality to collect the transfer tax from the non-exempt purchaser in a sale from a foreign state. As a broad application of that subsection appears to "effect a result inconsistent with the intent or expectations of its signatories", (See Chan v. Korea Airlines, Ltd., supra at 135 n5; In re Hogan (1986) 167 Cal.App.3d 819, 823), the court looks to the drafting history, the intent of the signatories and the opinion of the political branch. The notes of the Eleventh Meeting on the draft articles related to Article 31 (Exemption from taxation of consular premises) record the statement of the French delegate as noting for the record “that the unanimous view of the meeting was that paragraph 1 of article 31 should be interpreted as including exemption from property transfer taxes" and according to the notes "It was so agreed." (Apparently Article 31 was renumbered 32.) 

The message of the President of the United States to the Senate transmitting the treaty for ratification includes a report from the State Department and the United States delegation to the treaty conference. The report of the delegation recites that Article 32 "exempts from real estate taxes the consular premises of which the Sending State is the owner or lessee." The report notes that the language exempting “consular premises” was substituted for an exemption of the "sending State" to include a broader category of taxes levied against property as opposed to persons. Significantly, it further notes that the second paragraph of Article 32 "contains the qualification that where the premises are leased by the sending State and where under local law the owner rather than the tenant is obligated to pay the tax there is no exemption in favor of the owner." The above-referenced sources support the position of the Foreign Ministry that the exclusion applies to the transfer tax here and the subsection (2.) caveat was intended to apply where the premises were leased so as not to exempt the landlord from the payment of real estate taxes. To apply subsection (2) to the transfer tax here would effect a result inconsistent with the principles of comity and sovereignty and the intent of the signatories to the treaty.

Plaintiff to prepare a proposed Judgment.