Supreme Court to Determine if New York City Can Sue Foreign Countries Over Taxes

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First, it was parking tickets. Now, the dispute between New York City and United Nations diplomats centers on whether foreign countries should pay taxes on the high-rise apartments where they house their diplomatic workers.

The Supreme Court was to hear arguments Tuesday from lawyers representing India and Mongolia, which are fighting New York's effort to collect property taxes from nations that operate diplomatic offices and house their employees in the same buildings.

The two countries — and the State Department — want the court to declare that foreign missions have immunity from such a lawsuit.

Under U.S. treaties, embassies and other diplomatic buildings are generally tax-exempt, but the city claims countries are refusing to pay taxes on property used for non-diplomatic purposes, such as staff residences.

For years, the U.N. and the city sparred over millions of dollars in unpaid parking tickets racked up by envoys who rarely paid because of diplomatic immunity. The two sides finally struck a deal settling that issue in 2002.

A year later, the city filed a fresh lawsuit over property taxes, seeking $16.4 million in unpaid taxes and interest from India and $2.1 million from Mongolia for the floors in their respective buildings that are used solely for housing staff.

India and Mongolia insist that even when their employees are sleeping in apartments many floors above their offices, the staffers are always on call and therefore part of the mission.

"Housing diplomatic staff on mission premises to facilitate the performance of their diplomatic and governmental functions is as much a 'public' or 'governmental' purpose as housing soldiers in barracks on a military base or providing sleeping quarters for firemen in a firehouse," John Hawley, the lawyer representing India and Mongolia in the case, argued in court filings.

The city contends that living quarters stacked on top of diplomatic offices should be taxed like any other real estate.

New York City has singled out only a few countries with lawsuits. It has failed in attempts to collect taxes from other countries, including Hungary, Libya, Rwanda, Nigeria and Uganda. Turkey settled a lawsuit for $5 million, far less than the city initially sought.

The 2nd U.S. Circuit Court of Appeals last year affirmed a lower court decision that federal courts have the power to resolve such disputes. The permanent missions of India and Mongolia appealed that decision to the Supreme Court.

The case is Permanent Mission of India v. New York, 06-134.