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Second Circuit rules foreign diplomatic housing exempt from property taxes

By Hillary Stemple

[JURIST] A three-judge panel for the US Court of Appeals for the Second Circuit [official website] ruled [opinion, PDF] Tuesday that foreign diplomatic missions are not required to pay property taxes on real property used for housing staff and not diplomatic purposes. The ruling overturned judgments against India and Mongolia, which would have required the countries to pay a total of approximately USD $47 million in back taxes. The controversy arose when New York City attempted to assess property taxes on areas of foreign missions not used specifically for diplomatic work. The city argued that only portions of the diplomatic missions used explicitly for diplomatic purposes were exempt from property taxes, while the Indian and Mongolian missions maintained that entire diplomatic properties were exempt. In its ruling, the court cited a notice [materials] issued in 2009 by the US State Department (DOS) [official website] pursuant to the Foreign Missions Act [22 USC § 4301 et seq, PDF] which designated property tax exemption on real property owned by foreign governments and use for housing as a "benefit." The notice explicitly preempted all inconsistent state and local laws and applied to all property taxes that "have been or will be assessed." The court held that the notice was a lawful exercise of the DOS's authority and that it effectively nullified the existing property taxes owed by India and Mongolia. The city's corporation counsel, Michael Cardozo [official website], expressed his disappointment with the ruling [NYT report] and indicated that the city will appeal the decision to the US Supreme Court [official website; JURIST news archive].

The Supreme Court heard arguments [JURIST report] in 2007 in the case of Permanent Mission of India v. New York [Cornell LII backgrounder] in order to determine whether US courts have jurisdiction to hear claims against foreign governments regarding unpaid property taxes for diplomatic residences. The court ruled [opinion, PDF; JURIST report] that foreign governments may be sued for payment of local property taxes on real estate used for diplomatic residences, noting that "property ownership is not an inherently sovereign function," and that the Foreign Sovereign Immunities Act [text] "does not immunize foreign governments from lawsuits to declare the validity of tax liens on property held by the government" for diplomatic residences. The court remanded the case to the district court for further proceedings on the issue. The district court ruled in favor of New York in the second set of proceedings and India and Mongolia appealed the district court's ruling to the Second Circuit. The 2009 DOS Notice went into effect during the appeals process.

Full post as published by JURIST - The Paper Chase on August 18, 2010 (boomark / email).