Tax Win for City at High Court

The Supreme Court, in a victory for Mayor Bloomberg that could bring New York hundreds of millions of dollars, has opened the way for municipalities across the nation to hold foreign countries accountable for the tax abuses of their diplomatic staff in America.

A 7–2 ruling by the federal high court gives New York City the go-ahead to collect a so-called pillow tax from the diplomatic missions to the United Nations that dot Midtown and the Upper East Side. The ruling confers jurisdiction on American courts to hear the city's argument that many of those countries should be paying taxes on their diplomatic property. The city claims that it has a right to tax nations using missions to the United Nations for non-diplomatic purposes — such as providing living quarters for low-level staff.

The ruling came in lawsuits Mr. Bloomberg filed against the Indian and Mongolian missions to the United Nations. The suits tested whether the city could sidestep the immunity foreign nations are presumed to have in American courts.

The decision, Mr. Bloomberg said in a statement, "brings us closer to finally ensuring that countries with missions and consulates in New York pay their fair share in City taxes, just as all New Yorkers do."

The Supreme Court's decision could also spur Washington, D.C., and other cities across the nation to follow New York's lead and aggressively seek taxes from consulates and other diplomatic property.

The decision "will empower every local and state government across the United States that has a diplomatic premise to take a look and see if we can collect taxes from them," a partner at Bryan Cave LLP who has represented more than 25 missions and consulates in New York, Andrew Odell, said yesterday in response to the ruling.

Yesterday's win is expected to prompt New York to seek back taxes from other countries in addition to Mongolia and India. The city has already filed a similar suit against the Philippines and has reached a court settlement with Turkey for $5 million.

Mr. Odell, who served as Mayor Koch's liaison to the United Nations, said that during the 1980s, the city figured that as many as 40 foreign countries owed property taxes.

"We don't know the exact number of countries," the city's corporation counsel, Michael Cardozo, said in an interview. " But there are a number of others and we hope in light of the decision we will be able to resolve things without the need of litigation."

India, whose permanent mission to the United Nations is housed in a 26-floor building on East 43rd Street, owes $37.4 million, the city claims. The city is demanding $4.1 million from Mongolia, which owns a six-story building on East 77th Street. The figures include interest that the city says it is owed.

All told, a city official estimated that it could assess "hundred of millions" of dollars in back taxes against other foreign missions to the U.N as well.

The federal Justice Department had asked the Supreme Court to rule against New York City, arguing that other countries would simply retaliate by taxing American diplomatic property abroad.

The Vienna Convention on Diplomatic Relations, reached in 1961, gives tax exemptions for the residences of ambassadors and properties used to conduct diplomacy. But an open question remains as to whether that tax exemption covers the living quarters for lower level staff— such as chauffeurs and security guards — who may live adjacent to the ambassador. Both India and Mongolia have defended their use of diplomatic buildings to house such employees on the grounds that time differences between New York and the two countries often demand around-the-clock availability on the part of staff.

"Now we will simply have to prove that under the Vienna convention we are permitted to impose such taxes," Mr. Cardozo, said in an interview. "The Vienna convention says you can't tax the top diplomat. We think by implication it says you can tax everybody else."

The majority opinion, written by Justice Thomas, does not take up the question of whether that reasoning is correct. But in giving American courts jurisdiction to hear the tax dispute, the majority gave the city the opportunity to make its case before a judge.

At the center of the majority's opinion is the reasoning that an exception to the Foreign Sovereign Immunities Act for property disputes covered the city's tax claims.

"As a threshold matter, property ownership is not an inherently sovereign function," Justice Thomas wrote.

In a dissent, Justice Stevens said that the courts were not the proper way for the city to resolve tax disputes with its diplomatic residents.
"Diplomatic channels provide the normal method of resolving disputes between local government entities and foreign sovereigns," Justice Stevens, who was joined by Justice Breyer, wrote.

The dissent also said that the majority's ruling could open the way for individuals to bring routine lawsuits — such as sidewalk slip-and-falls, or landlord-tenant disagreements— against foreign countries in American courts.

Neither the Mongolian nor Indian mission returned calls for comment.

"We're studying the opinion," a lawyer for the two countries, Robert Kandel of Kaye Scholer, said.