updated 4/24/2007 7:30:01 PM ET 2007-04-24T23:30:01

Supreme Court justices cast a skeptical eye Tuesday on claims that U.N. diplomats should not pay property taxes to New York City, despite a lawyer's warning that a ruling for the city could mean higher bills for U.S. sites around the world.

The court heard arguments from two countries being sued for taxes New York claims it is owed on high-rise apartments that house mission offices and residences for diplomatic workers.

"Whatever happens in this case to India and Mongolia is likely to happen to the United States around the world," warned John Howley, a lawyer representing the two countries.

"You mean we'll have to start paying our taxes?" Justice Antonin Scalia asked playfully.

"I'm afraid so," answered Howley.

A lawyer for the city argued that a decision against the city would mean foreign governments with property in the United States could flout local tax laws with impunity.

"If we can't bring this lawsuit" said city lawyer Michael Cardozo, "this lawsuit can't be brought anywhere."

The court must decide whether the city is allowed to sue foreign countries to collect property taxes from countries that operate offices and house their employees in the same building.

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. The missions of India and Mongolia house their staff on floors above their offices.

India and Mongolia insist that even a sleeping diplomat is being diplomatic, because their employees are always on call, and therefore part of the mission.

The city filed suit in 2003 seeking $16.4 million from India and $2.1 million from Mongolia for what it claims are unpaid real estate taxes on residential space. The two countries — and the State Department — want the court to declare that foreign missions have immunity from such a lawsuit.

Roberts questions reversal
Chief Justice John Roberts questioned why the government was reversing its stance from a 1985 case against Libya, in which the U.S. argued Libya was not immune from a local tax claim.

"I think the department submitted a very good brief on this case, but in 1985," said Roberts. "They may just be more sympathetic to India and Mongolia than they were to Libya."

The U.S. lawyer, Sri Srinivasan, said the agency's past position was incorrect and hadn't been revisited since then.

The government contends foreign countries will retaliate to a ruling in New York City's favor, by placing their own liens on U.S.-owned property and making it more difficult to buy, sell, and construct diplomatic property overseas.

One survey found 90 percent of 160 nations exempt the U.S. government from annual property taxes on diplomatic residences.

Even amid the heady debate over international rights, the justices' conversation often veered to a more mundane subject painfully familiar to diplomats and everyday New Yorkers: parking tickets.

Justice Ruth Bader Ginsburg questioned whether a city could place a lien on foreign-owned property in an effort to collect overdue parking fines.

Howley said that if the city prevails in the property tax case, it could in theory pass a local law seeking to do the same thing for parking tickets.

Parking tickets a legendary bugaboo
The parking habits of U.N. diplomats has long been a sore spot in New York. For years, the city has feuded with the global organization 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 legal fight began over property taxes.

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.

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