WASHINGTON - Supreme Court justices cast a skeptical eye yesterday on assertions 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 that New York says 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," Howley answered.

Michael Cardozo, a lawyer for New York City, argued that a decision against the city would mean that foreign governments with property in the United States could flout local tax laws with impunity. "If we can't bring this lawsuit," he said, "this lawsuit can't be brought anywhere."

The court must decide whether the city may 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. The city, though, contends that countries are refusing to pay taxes on property used for nondiplomatic 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 sleeping diplomats are being diplomatic, because their employees are always on call and, therefore, part of the mission.

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

Chief Justice John G. Roberts Jr. questioned why the government was reversing its stance from a 1985 case against Libya, in which the United States argued that Libya was not immune from a local tax claim.

The government "may just be more sympathetic to India and Mongolia than they were to Libya," Roberts said. The U.S. lawyer, Sri Srinivasan, said the government's past position was incorrect and had not been revisited since then.

The government maintains that foreign countries will retaliate if the court finds 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 that 90 percent of 160 nations exempt the U.S. government from annual property taxes on diplomatic residences.

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 New York-based U.S. Court of Appeals for the Second Circuit last year affirmed a lower-court decision that federal courts had 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.

Read a transcript of

the court arguments via http://go.philly.com/diplomatEndText