Appeal from an opinion and order of the United States District Court for the Southern District of New York (Rakoff, J.) granting summary judgment to the Plaintiff the City of New York.
The opinion of the court was delivered by: Calabresi, Circuit Judge:
City of New York v. The Permanent Mission of India to the United Nations; City of New York v. The Bayaryn Jargalsaikhan
(consolidated for disposition)
Before: CALABRESI, HALL, Circuit Judges, SESSIONS,*fn1 District Judge.
The District Court held that property owned by the governments of India and Mongolia 9 that is used to house mission and consular staff was subject to property taxation under 10 international and state law. While this appeal was pending, the United States Department of 11 State issued a Notice pursuant to the Foreign Missions Act, 22 U.S.C. § 4301 et seq., designating 12 as a "benefit" under the Act an exemption from real property taxes on property owned by foreign 13 governments and used to house the staff of permanent missions to the United Nations or the 14 Organization of American States or of consular posts. The Notice states that the benefit 15 determination preempts all inconsistent state and local laws, and also applies to all property taxes 16 that "have been or will be assessed," on such property. We hold that the Notice issued by the 17 Department of State was a lawful exercise of the Department's authority under the Foreign 18 Missions Act, and that the Notice operates in this case to render Appellants exempt from the 19 property taxes imposed by the City, and so nullifies the City's existing tax liens against 20 Appellants. Accordingly, we VACATE the opinion of the District Court, REVERSE the 21 judgment of the District Court, and REMAND.
Assistant United States Attorney, Douglas Letter, Attorney, United States Department of Justice, Civil Division, Appellate Staff, on the briefs), for Amicus Curiae United States of America. 8 These consolidated appeals arise from a long-standing tax dispute between the City of 9 New York ("the City") and certain foreign sovereigns who operate missions to the United 10 Nations in the City. For years, the City has assessed property taxes against these missions, 11 maintaining that while those parts of embassy buildings that are used for diplomatic offices are 12 exempt from property taxation under international and state law, other parts of the buildings-- 13 those that are used as residences for employees and their families--are not exempt. Appellants, 14 the Permanent Mission of India to the United Nations (the "India Mission") and the Principal 15 Resident Representative of the Mongolian People's Republic to the United Nations (the 16 "Mongolia Mission")--collectively "the Missions"--have resisted paying any property taxes to 17 the City. They contend that their entire embassy buildings are tax exempt.
18 This dispute, and the litigation it engendered, ultimately prompted the United States 19 Department of State ("Department of State" or "State Department") to act. In June 2009, the 20 State Department issued a notice pursuant to its authority under the Foreign Missions Act, 22 21 U.S.C. § 4301 et seq., establishing an exemption from real property taxes on property owned by 22 foreign governments and used to house the staff of permanent missions to the United Nations or 23 the Organization of American States or of consular posts. See Designation and Determination 24 under the Foreign Missions Act (the "State Department Notice" or the "Notice"), 74 Fed. Reg. 25 31,788 (July 2, 2009). The Notice stated that this exemption would preempt inconsistent State 3 1 and local laws and also that it would apply retroactively to taxes that had been previously 2 assessed against the designated property. Id. We are now called upon to determine whether the 3 action taken by the State Department was within its statutory authority. We conclude that it was. 4 Specifically, we hold that the Foreign Missions Act ("FMA") permits the State Department to 5 designate affirmative benefits such as tax exemptions and that the Act allows the State 6 Department to make such tax exemptions preemptive of State and municipal tax laws. We also 7 hold that, under the circumstances of this case, the State Department acted within its power in 8 designating this benefit as effective retroactively. Finally, we conclude that the Notice issued by 9 the State Department was procedurally proper because it falls within the "foreign affairs 10 function" exception to notice and comment under the Administrative Procedure Act, 5 U.S.C § 11 553(a)(1).
14 The India Mission is housed in a twenty-six story building, located at 235 East 43rd 15 Street, New York, N.Y., and owned by the government of the Republic of India. The first six 16 floors of the building, as well as the basement and the cellar, are used for diplomatic offices. 17 The remaining floors are dedicated to rent-free residential space for security personnel, a driver, 18 and the diplomats of the Mission and of India's consulate in New York (the offices of which are 19 located elsewhere in the City). All of these employees rank below the head of the Mission, 20 whose residence is not on site. The Mongolian Mission is housed in a multi-story building at 6 21 East 77th Street in New York City that is owned by the People's Republic of Mongolia. The 22 first two floors are used for the Mission's offices. The third floor is used for the Ambassador's 4 1 apartment. The top two floors are used as rent-free apartments for other employees of the 2 Mission.
3 The City has consistently taken the position that mission property used for the residences 4 of lower-level employees is subject to taxation, and it has been levying taxes on such properties 5 for years. Both the India Mission and the Mongolia Mission have argued that these residences 6 are exempt from taxation under international and New York law because the residences are used 7 for the purposes of the mission/consulate. They have therefore refused to pay any property taxes 8 to the City. By operation of New York law, the unpaid taxes converted into tax liens held by the 9 City against the relevant properties.
In April 2003, the City filed separate complaints against several foreign missions in New 13 York state court. *fn2 Pursuant to 28 U.S.C. § 1441(d), the Missions removed the cases to the 14 United States District Court for the Southern District of New York. In its amended complaints, 15 the City sought judgments for unpaid property taxes (and other unpaid charges) plus interest. 16 The City also sought declaratory judgments to establish the validity of its tax liens against these 17 missions. After limited jurisdictional discovery, the India Mission and the Mongolia Mission 1 moved to dismiss, contending that, pursuant to the Foreign Sovereign Immunity Act ("FSIA"), 2 28 U.S.C. § 1604, the District Court lacked subject matter jurisdiction. The District Court denied 3 the motion. It concluded that under the FSIA's "immovable-property" exception--which 4 provides that "[a] foreign state shall not be immune from jurisdiction . . . in any case . . . in 5 which rights in . . . immovable property situated in the United States are in issue," 28 U.S.C. § 6 1605(a)(4)--the court had jurisdiction to adjudicate the validity of the City's tax liens. See City 7 of N.Y. v. Permanent Mission of India to the U.N. ("Permanent Mission I"), 376 F. Supp. 2d 8 429, 439 (S.D.N.Y. 2005).
9 The Missions filed an interlocutory appeal that was limited exclusively to the 10 jurisdictional issue. We affirmed the judgment of the District Court, holding that the immovable 11 property exception to foreign sovereign immunity provided jurisdiction over the matter because 12 what was in dispute was "the extent of defendants' obligations under local law (here, property 13 taxes) arising directly out of ownership of real property in the United States." See City of N. Y. v. 14 Permanent Mission of India to the U.N., 446 F.3d 365, 376 (2d Cir. 2006). The Supreme Court 15 granted certiorari, 549 U.S. 1177, and affirmed. Permanent Mission of India to the U.N. v. City 16 of N.Y., 551 U.S. 193 (2007).
18 The cases were then remanded to the District Court for proceedings on the merits. The 19 parties cross-moved for summary judgment on the question of whether the parts of the properties 20 used by India and Mongolia to house their staff were subject to real estate taxation. The District 21 Court held that they were. See City of N.Y. v. Permanent Mission of India to the U.N. 22 ("Permanent Mission II"), 533 F. Supp. 2d 457, 460 (S.D.N.Y. 2008).
1 The District Court first addressed the Missions' claimed tax exemption under the 2 applicable Vienna Conventions: a) Article 32 of the Vienna Convention on Consular Relations, 3 ("VCCR"), Apr. 24, 1963, 21 U.S.T. 77, (ratified 1969), for the portions of the premises that 4 house consular staff and b) Article 23 of the Vienna Convention on Diplomatic Relations 5 ("VCDR"), Apr. 18, 1961, 23 U.S.T. 3227, (ratified 1972), for the portions of the premises that 6 house the U.N. Missions. Under the VCCR, 7 [c]onsular premises and the residence of the career head of consular post of which 8 the sending State or any person acting on its behalf is the owner or lessee shall be 9 exempt from all national, regional or municipal dues and taxes whatsoever, other 10 than such as represent payment for specific services rendered. 11 VCCR art. 32. "[C]onsular premises" are defined in the VCCR as "the buildings or parts of 12 buildings and the land ancillary thereto . . . used exclusively for the purposes of the consular 13 post." Id. art. 1(j). As the District Court explained, the VCDR "reaches the same result as the 14 VCCR but through a slightly more circuitous route." Permanent Mission II, 533 F. Supp. 2d at 15 461. Article 1 of the VCDR defines "premises of the mission"*fn3 to comprise:
16 the buildings or parts of buildings and the land ancillary thereto, irrespective of 17 ownership, used for the purposes of the mission including the residence of the 18 head of the mission.
19 VCDR art. 1(i). Article 23, in turn, provides:
20 The sending State and the head of the mission shall be exempt from all national, 21 regional or municipal dues and taxes in respect of the premises of the mission, 22 whether owned or leased, other than such as represent payment for specific 23 services rendered.
25 The District Court held that "the plain language of the VCCR and the VCDR 26 unequivocally supports the City's position" that the portions of the missions used to house 1 employees and their families are not tax exempt. Permanent Mission II, 533 F. Supp. 2d at 461.
2 The Court reasoned that both the VCCR and VCDR limited tax exemptions to the actual office 3 space of the consular or mission premises and to the residence of the head of the mission or 4 consular post. The District Court observed that the VCCR "distinguishes for tax purposes 5 between 'consular premises' and 'residence,'" which led the Court to conclude that the provision 6 "limits the tax exemption respecting residence to 'the residence of the career head of consular 7 post' and none other." Id. at 460-61. Similarly, with respect to the VCDR, the District Court 8 found that the two provisions quoted above, "when taken together, make plain that the residential 9 exemption from taxes is limited to 'residence of the head of the mission,' and not to others." Id. 10 at 461.
11 The District Court then rejected the Missions' remaining arguments, including their 12 contention that disputed portions of the missions were exempt from taxation under customary 13 international law.*fn4 See id. at 461-62. Accordingly, the District Court granted the City's motion 14 for summary judgment, thereby validating its tax liens and its assessment of taxes with interest 15 against India and Mongolia. See id. at 470. The Court asked the parties to submit letters 16 regarding the amounts due to the City. In a subsequent order, the District Court rejected all of 17 the Missions' objections to the City's calculations, including their general objection that the 18 interest rates imposed by the City were "exorbitant." See City of N.Y. v. Permanent Mission of 19 India to the U.N. ("Permanent Mission III"), 538 F. Supp. 2d 701, 703 (S.D.N.Y. 2008).
Judgment was therefore entered against the India Mission in the amount of $42,451,769.35 and 2 against the Mongolia Mission in the amount of $4,395,003.13. Id. at 704.*fn5 Both the India 3 Mission and the Mongolia Mission filed notices of appeal.
5 On June 23, 2009, while this appeal was pending, the Department of State issued a notice 6 entitled Designation and Determination under the Foreign Missions Act, 74 Fed. Reg. 31,788.
7 Invoking its authority under the FMA, the State Department "designate[d] [an] exemption from 8 real property taxes on property owned by foreign governments and used to house staff of 9 permanent missions to the United Nations or the Organization of American States or of consular 10 posts as a benefit for purposes of the Foreign Missions Act." Id. (emphasis added). The Notice 11 further explained that the exemption "shall be provided to such foreign missions on such terms 12 and conditions as may be approved by the Office of Foreign Missions and that any state or local 13 laws to the contrary are hereby preempted." Id. (emphasis added).
14 The Notice stated that the action taken was "in accord with the tax treatment of foreign 15 government-owned property in the United States used as residences for staff of bilateral 16 diplomatic missions and conforms to the general practice abroad of exempting government- 17 owned property used for bilateral or multilateral diplomatic and consular mission housing." Id. 18 (citation omitted). The State Department explained its action as follows:
19 This action is necessary to facilitate relations between the United States and 20 foreign states, to protect the interests of the United States, to allow for a more cost1 effective approach to obtaining benefits for U.S. missions abroad, and to assist in 2 resolving a dispute affecting U.S. interests and involving foreign governments 3 which assert that international law requires the exemption from taxation of such 4 diplomatic and consular properties. The dispute has become a major irritant in the 5 United States' bilateral relations and threatens to cost the United States hundreds 6 of millions of dollars in reciprocal taxation. As the largest foreign-government 7 property owner overseas, the United States benefits financially much more than 8 other countries from an international practice exempting staff residences from real 9 property taxes, and it stands to lose the most if the practice is undermined.
10 Responsive measures taken against the United States because of the dispute also 11 have impeded significantly the State Department's ability to implement urgent 12 and congressionally mandated security improvements to our Nation's diplomatic 13 and consular facilities abroad, imposing unacceptable risks to the personnel 14 working in those facilities. This action will allow the United States to press 15 forward with improvements that will protect those who represent the Nation's 16 interests abroad.
18 The State Department explicitly addressed the Notice's intended retroactive effect, 19 asserting that the 20 exemption from real property taxes provided by this designation and 21 determination shall apply to taxes that have been or will be assessed against any 22 foreign government with respect to property subject to this determination, and 23 shall operate to nullify any existing tax liens with respect to such property, but 24 shall not operate to require refund of any taxes previously paid by any foreign 25 government regarding such property.
26 Id. (emphasis added). Finally, the State Department indicated that the actions taken in the Notice 27 "are not exclusive and are independent of alternative legal grounds that support . . . tax 28 exemption." Id.
29 We granted the Government's motion to submit out of time an amicus brief formally 30 apprising the Court of the Notice and discussing its legal implications. We then gave the parties 1 an opportunity to respond, and allowed the Government to file a supplemental amicus brief to 2 reply to the City's arguments.*fn6
3 The two cases were argued together, and we have now consolidated them for disposition.
5 The State Department Notice squarely applies to the tax dispute at issue in this case. The 6 Notice (1) provides that, as a benefit under the FMA, "property owned by foreign governments 7 and used to house staff of permanent missions . . . or of consular posts" is exempt from real 8 property taxation; (2) states that "any state or local laws to the contrary," such as those of New 9 York City, are preempted; and (3) expressly states that the tax exemption is to apply retroactively 10 to taxes that have previously been assessed and "shall operate to nullify any existing tax liens" 11 with respect to the affected property. 74 Fed. Reg. 31,788 (emphasis added). Therefore, if the 12 State Department's issuance of the Notice was procedurally proper, and if the actions taken in 13 the Notice are within the Secretary's lawful authority under the FMA, then the Notice is 14 dispositive of this case and requires that we find in favor of the Missions irrespective of whether 15 the Missions are also entitled to immunity from taxation under either international or state law.
16 After outlining the relevant provisions of the FMA, we address the issue of whether the 17 Notice establishing the tax exemption as a "benefit" is lawful as applied prospectively. We then 18 consider whether it was within the State Department's authority to designate such a benefit to be 19 effective retroactively. Finally, we address whether the ...