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Supreme Court Backs NYC Bid To Collect Tax From Foreign Governments

by Leroy Baker, Tax-News.com, New York

18 June 2007


The US Supreme Court ruled last week that real estate tax claims asserted by New York City against the governments of India and Mongolia can proceed to trial in district court, despite the opposition of both the US government and the foreign governments involved.

The case involves the City’s efforts to collect over $18 million in property taxes on buildings that those countries use to house staff of their United Nations missions. Corporation Counsel Michael A. Cardozo personally argued the case in Washington, D.C., on April 24th of this year.

In its opinion today, written by Justice Clarence Thomas, the Supreme Court decided that US courts have jurisdiction to hear and resolve the dispute between the City and two sovereign nations. However, it is now up to the district court to decide whether India and Mongolia actually owe the taxes.

“This is a critical decision for the rule of law,” Corporation Counsel Cardozo said. “Without this ruling, the City had no other legal avenue under which it could obtain recourse. The justices took a proactive, groundbreaking stand in upholding the City’s argument. Now India and Mongolia, as well as other countries, know the City ‘means business’ in pursuing appropriate taxes that are owed.”

After attempting to settle these outstanding tax bills, the City Commission requested that the Law Department pursue these claims; the Commission, together with the New York City Department of Finance, worked with the Law Department to develop the case.

“We are gratified that the Supreme Court ruled that US courts have jurisdiction in this matter. This will allow New York City to argue the merits of the pending tax dispute against India and Mongolia,” said Marjorie Tiven, Commissioner, NYC Commission for the United Nations, Consular Corps and Protocol. “New York City welcomes the diplomatic community and provides many services, such as public safety, at no cost to foreign governments. We do, however, expect them to pay their fair share of taxes for portions of property used for non-diplomatic purposes.”

“The City seeks taxes for non-diplomatic uses; in this case, housing for foreign government personnel who use City services daily,” added Bradford Billet, Deputy Commissioner, NYC Commission. “These countries do receive an exemption for the property actually used for diplomatic purposes.”

In its case, the City argued that its claims should be heard, because they fall within a federal law (the Foreign Sovereign Immunities Act) that provides certain exceptions to the immunity from lawsuits typically granted foreign countries under international and domestic law. Both lower courts that initially heard the case – the US District Court for the Southern District of New York (ruling on July 6, 2005) and the US Court of Appeals for the Second Circuit (ruling on April 26, 2006) – upheld the City’s argument and decided that the courts did have jurisdiction to hear the case.

Those courts concluded, as the Supreme Court did in its ruling today, that there was in fact jurisdiction, because the City’s tax claims put at issue “rights in immovable property,” thereby fitting within an exception to immunity provided under the Foreign Sovereign Immunities Act, a federal statute that governs when foreign countries can be sued in US courts. The Supreme Court’s decision backs the two lower courts, allowing the City’s case to return to US District Court in New York City for hearing on the merits.

The Court wrote that, “Property ownership is not an inherently sovereign function,” and therefore, this dispute is subject to the jurisdiction of US courts. “The practical effects of a lien,” the Court added, “bear out these definitions of liens as interests in property. As such, ‘a lien has an immediate adverse effect upon the amount which [could be] receive[d] on a sale,...constitut[ing] a direct interference with the property...”

Joining Justice Clarence Thomas’s majority opinion were Chief Justice John G. Roberts Jr. and Justices Samuel Anthony Alito, Jr.; Ruth Bader Ginsberg; Anthony M. Kennedy; Antonin Scalia; and David Hackett Souter.

Justice John Paul Stevens wrote the dissent, joined by Justice Stephen G. Breyer.

The properties involved in the current Supreme Court case are located in Manhattan. India owns a building in midtown located at 235 E. 43rd St., and Mongolia owns a building on the Upper East Side located at 6 E. 77th St. India’s tax arrears date back to 1991 and Mongolia’s date back to 1980. As of Jan. 31, 2003, India owed approximately $16 million in taxes and interest, and Mongolia owed approximately $2 million.

The US Government had opposed the City’s position. The United Sates Solicitor General had filed an amicus or “Friend-of-the-Court” brief in support of India’s and Mongolia’s argument that the courts lacked jurisdiction over the City’s claims. During oral argument in April, the Court expressed deep skepticism over the government’s assertions.

In particular, it focused on a 1985 position the US Government took in a case pending in the US Court of Appeals for the Third Circuit – one opposite from the position it now advocates. In that case, it had urged that Court to find jurisdiction over a case virtually identical to the City’s. As to the dispute’s merits (i.e. whether property taxes must be paid on staff housing), the US Government has continuously advised UN missions that they must pay property taxes on such staff housing.

Sri Srinivasan of the Solicitor General’s Office of the United States represented the Government at oral argument, and John J.P. Howley, of the law firm of Kaye Scholer, LLP, argued on behalf of India and Mongolia.

In addition to Corporation Counsel Cardozo, Norman Corenthal, John Low-Beer and Brad Snyder of the New York City Law Department have also worked extensively on the case, as had Bradford E. Billet, Deputy Commissioner, NYC Commission for the United Nations, Consular Corps and Protocol.


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