A federal appeals court dealt a setback on Tuesday to the Bloomberg administration’s seven-year effort to collect taxes on space in diplomatic missions that the city says is not used for diplomatic purposes.
A three-judge panel of the United States Court of Appeals for the Second Circuit ruled in favor of India and Mongolia, which had challenged the city’s efforts to collect more than $50 million in taxes and interest. It was unclear if the decision would affect the city’s ability to collect taxes from other countries’ missions.
The decision was the latest twist in a complicated case with decisions that had gone for and against the city. In the last few years, the city had seemed to have the upper hand. When the case went to the United States Supreme Court on a jurisdictional issue, the city won. The justices sent the remaining elements back to a lower court, where the city once again prevailed.
Along the way, the city also collected multimillion-dollar settlements from two foreign governments, Turkey and the Philippines, that had balked at paying city property taxes.
But the tide seemed to have turned with a 2009 State Department notice that served as the basis for the ruling on Tuesday. The 2009 notice conferred a tax exemption on property owned by foreign governments and used as living quarters for staff members assigned to the United Nations or consular posts. The State Department applied the tax exemption retroactively.
Aaron Stiefel, a lawyer who represented India and Mongolia, called the decision “a complete victory.”
“It eliminates the taxes both past and future,” he said, “and it resolves what the U.S. government viewed as a point of potential friction between the United States and foreign countries.”
Michael A. Cardozo, the city’s corporation counsel, said he was “extremely disappointed” with the ruling. “This provides a free ride for foreign countries owning certain properties in New York City while unnecessarily burdening local taxpayers,” he said in a statement. He said the city would take the case to the United States Supreme Court.
The State Department notice came seven years after the city had taken India and Mongolia, along with the Philippines and Turkey, to court over property taxes. The case began in State Supreme Court but eventually moved to federal court and went to the Supreme Court, which ruled in 2007 that the federal courts had jurisdiction to decide municipal tax claims against foreign governments.
The justices sent the case back to lower courts, and in 2008 a judge said that India, Mongolia and the Philippines owed the city $57.6 million.
Last year, the Philippines settled with the city, promising to pay $9.9 million in back taxes and interest for a building on Fifth Avenue where the Philippine National Bank had had a branch and Philippine Airlines had had a ticket office from the mid-1970s to the mid-1990s. A restaurant also occupied space in the building. A lower court awarded the city $10.9 million in taxes and interest for the bank and the airline office but ruled that the restaurant was exempt.
Turkey, which also was sued by the city in 2003, had already settled for $5.1 million.
India and Mongolia continued their challenges, leading to the decision by the Second Circuit panel. The judges said that the State Department had the power to issue the 2009 notice. “The city’s tax liens are invalid, and no taxes on property owned by foreign governments and used to house staff of permanent missions to the United Nations or of consular posts are due,” the justices wrote.