The court rejected an argument by India and Mongolia that the principle of sovereign immunity shielded them from a lawsuit the city filed in 2003 to establish its right to collect what it says is now about $25 million in unpaid taxes and interest.
“Property ownership is not an inherently sovereign function,” Justice Clarence Thomas said for the 7-to-2 majority.
The dissenters were Justices John Paul Stevens and Stephen G. Breyer.
The decision upheld a ruling issued last year by the United States Court of Appeals for the Second Circuit, in Manhattan.
The Supreme Court agreed to hear the appeal by India and Mongolia at the urging of the Bush administration, which told the court that allowing suits against foreign countries for unpaid property taxes would “adversely affect the nation’s foreign relations.”
Michael A. Cardozo, New York City’s corporation counsel, said on Thursday that to the contrary, “this is a critical decision for the rule of law.”
Mr. Cardozo, the city’s top lawyer, who argued the case in April, called the decision “groundbreaking.”
The only issue before the Supreme Court was whether the federal courts had jurisdiction to hear such a case. With its jurisdiction established, the Federal District Court in Manhattan will now proceed to decide whether the two countries actually owe taxes and, if so, how much.
A declaration that taxes are due would not, by itself, be enforceable. The city would not be able to foreclose on the property at issue, India’s 26-story building on East 43rd Street and Mongolia’s six-story building on East 77th Street.
But the city’s expectation is that in the face of a court’s declaration of liability, the governments will pay.
Further, its hope is that the decision, Permanent Mission of India v. City of New York, No. 06-134, will remind the 190 other foreign missions in the city of their obligations.
For the last few years, a federal law, the Foreign Operations Appropriations Act, has included an amendment that penalizes countries with unpaid tax obligations by withholding from their foreign aid 110 percent of the amount they owe.
Senator Charles E. Schumer, the New York Democrat who sponsored that provision, said on Thursday that the Supreme Court had “sent a loud and clear message: ‘Diplomats are not above the law.’ ”
Under New York State’s tax law, property owned by a foreign government is exempt from taxation if it is used exclusively either for diplomatic offices or as housing for an ambassador or a senior minister.
India uses 20 floors of its building to house lower-ranking employees, and Mongolia uses three of its six floors for that purpose.
When the two missions declined to pay the tax bills from the city, New York put a tax lien on the buildings and went to court for a declaration that the liens were valid.
The missions argued that they were immune from suit under a 1976 federal law, the Foreign Sovereign Immunities Act.
Under that law, foreign governments are presumed to be immune from suit unless the case falls under one of the statute’s specific exceptions.
New York, in turn, cited the “immovable property” exception, under which foreign governments are not immune in a case in which “rights in immovable property situated in the United States are in issue.”
The question for the Supreme Court was therefore whether a tax lien puts a property right at issue. India and Mongolia argued that the exception covered only suits about the ownership or possession of property, not taxes.
As had the lower courts, the Supreme Court disagreed.
Justice Thomas observed that a lien “runs with the land” and limits the ability of an owner to sell the property to someone else.
“A tax lien thus inhibits one of the quintessential rights of property ownership — the right to convey,” Justice Thomas said, adding, “It is therefore plain that a suit to establish the validity of a lien implicates ‘rights in immovable property.’ ”
In the dissenting opinion, Justice Stevens, joined by Justice Breyer, said the court’s analysis opened the door too widely by allowing the existence of a tax lien to invoke the property exception.
New York law allowed tax liens for a variety of landlord-tenant problems, he said, adding, “If Congress had intended the statute to waive sovereign immunity in tax litigation, I think it would have said so.”