An Unspoken Application of International Comity Lies at the Heart of Second Circuit’s Rejection of New York City’s Effort to Tax Non-U.S. Missions, Which the Court of Appeals Held Was Preempted by the Retroactive Federal Action Despite the Absence of Sovereign Immunity.

 In the recent decision by the Second Circuit, City of New York v. The Permanent Mission of India to the United Nations, 08-1805, 1806 (2d Cir. 8/17/10), the Court of Appeals continued the saga of New York City’s attempts to tax the missions in NYC of the governments of India and Mongolia. In earlier proceedings, the district court, the Second Circuit, and the U.S. Supreme Court each concluded that the FSIA’s “immovable property” exception (which provides that a “foreign state shall not be immune from jurisdiction . . . in any case . . . in which rights in . . . immovable property situated in the United States are in issue” (28 U.S.C. sec. 1605(a)(4)) applied, and, as a result, there was no sovereign immunity defense for the non-U.S. missions.  After remand to the District Court for proceedings on the merits in favor of the City, and after judgment in the District Court for the City based on the facts that existed – indeed, during which that judgment was on appeal – the Department of State issued a notice entitled Designation and Determination under the Foreign Missions Acxt, 74 Fed. Reg. 31,788. The notice retroactively preempted the City’s imposition of taxes and operated to “nullify any existing liens wit respect to such property”.
 
The Second Circuit determined that the Department of State was entitled to promulgate pre-empting, retroactive rules that have the force of federal law.  The primary interest of the U.S. in such a rule, as the Court of Appeals said, is that the U.S. is “the largest foreign-government property owner overseas”, “the United States benefits financially much more than other countries from an international practice exempting staff residences from real property taxes, and it stands to lose the most if the practice is undermined”. 
 
It is noteworthy that the hoped- for reciprocity is the same motivation behind the courts’ interpretation of 28 U.S.C sec. 1782, where the Second Circuit has held that the U.S.’s broad interpretation of section 1782 was done for a chief purpose of “encouraging foreign countries by example to provide similar means of assistance to our courts”. In re Application of Malev Hungarian Airlines, 964 F.2d 97, 100 (2d Cir 1992); accord Metallgesellschaft v. Hodapp, 121 F.3d 77, 79 (2d Cir. 1997) (the author was lead counsel in this case). In these significant areas – allowing broad discovery under 1782 and disallowing tens of millions of dollars of taxes – the judicial decisions do not cite any meaningful data to support the existence of actual reciprocal treatment by other jurisdictions.
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