I have in the past written about property taxes, and have noted that anyone who owns real estate in Arizona, or just about anywhere else, knows that property taxes are inescapable. Unless you are a government agency, a church, or a charity, you pay property taxes or (eventually) you lose your property. The types of property that are exempt from property taxes, or more accurately the types of uses of property that cause the property to be exempt from property taxes, are established by Arizona law.
It turns out that, at least under some conditions, there is another category of real estate that is exempt from property taxes: real estate owned by foreign countries. The case that caught my eye, The Permanent Mission of India to the United Nations, et al. v. City of New York, New York, was recently the subject of a published decision by the Second U. S. Circuit Court of Appeals. The decision was about whether the State Department had the authority to grant an exemption from state and local property taxes for foreign-owned property used for diplomatic missions. The thing that made it interesting to me, however, was the practical application of the property tax laws that were the cause of the dispute.
Under New York law, property in that state is exempt from property taxes if it is owned by a foreign government and is used exclusively for diplomatic offices or for the quarters of a diplomat “with the rank of ambassador or minister plenipotentiary” to the United Nations. Now, this could cover a fair amount of pretty valuable real estate in the neighborhood of the United Nations headquarters in Manhattan. For whatever reason, however, the legislature of New York decided that it would be a good idea to grant a property tax exemption to foreign governments as long as the property is used for the specified purpose.
Unfortunately for New York, the governments of India and Mongolia decided that exemption wasn’t good enough, because it still left subject to tax the top twenty floors of the Indian-owned building, and the top two floors of the Mongolian-owned building, that are used for lower-ranking employees of their diplomatic missions. Here is the court’s description of the particular properties that were the subject of the case:
The India Mission is housed in a twenty-six story building, located at 235 East 43rd Street, New York, N.Y., and owned by the government of the Republic of India. The first six floors of the building, as well as the basement and the cellar, are used for diplomatic offices. The remaining floors are dedicated to rent-free residential space for security personnel, a driver, and the diplomats of the Mission and of India’s consulate in New York (the offices of which are located elsewhere in the City). All of these employees rank below the head of the Mission, whose residence is not on site. The Mongolian Mission is housed in a multi-story building at 6 East 77th Street in New York City that is owned by the People’s Republic of Mongolia. The first two floors are used for the Mission’s offices. The third floor is used for the Ambassador’s apartment. The top two floors are used as rent-free apartments for other employees of the Mission.
It never occurred to me that the Republic of India would own a twenty-six story building, and the People’s Republic of Mongolia would own a six story building, in New York City that are used solely for their respective missions to the United Nations. Imagine the size of the building that the People’s Republic of China must own for its UN mission.
A bit of background on how property tax liens work is in order here. A tax lien represents an unpaid tax which is an encumbrance on the title to the property. The lien remains attached to the property until the tax is paid or until the lien is foreclosed, even if the owner sells the property. The tax lien gives the owner of the lien (which can be the government or, in some cases, a private party who acquires the lien from the government) an interest in the property.
The dispute over the property taxes on these buildings has been going on for a log time, apparently. According to an Associated Press report on the court’s decision, the total unpaid taxes on the Republic of India’s building totaled $42.4 million, while the People’s Republic of Mongolia’s total was $4.3 million. That’s real money, as they say. The size of those amounts is probably a function of both the length of time over which the taxes accrued and the (undoubtedly substantial) value of the properties.
The question that the court actually decided had little to do with property tax law. The question was whether the Secretary of State had the authority under the Foreign Missions Act to grant an exemption from property taxes for foreign governments’ property used to house the staff of permanent missions to the United Nations. The court ruled, after a lengthy discussion of this dry subject, that the Secretary of State does have that authority, with the result that the entire buildings are exempt from property taxes, including taxes that had already been assessed. This means that the tax liens on the properties are unenforceable, even as to the taxes that accrued before the Secretary of State granted the exemption
So, the Republic of India and the People’s Republic of Mongolia don’t have to pay property taxes on their buildings. The Republic of Turkey and the Republic of the Philippines weren’t as fortunate. They decided to settle rather than fight, and paid (according to the Associated Press) $6 million and $9 million in back taxes, respectively. The report didn’t say how big their buildings are, but those amounts indicate that they are bigger than Mongolia’s building.
I guess I’m ignorant of the realities of world diplomacy. I find it surprising, and rather amusing, that the People’s Republic of Mongolia would own Manhattan real estate. If the Second Circuit’s decision stands, the People’s Republic just saved themselves (and every other foreign government that owns Manhattan real estate to house a mission to the United Nations) a whole lot of property taxes.