The D.C. Court of Appeals has reversed a District zoning panel's decision that permitted Taiwan's defense procurement division to locate its offices in a Dupont Circle building.

The ruling by a three-judge appeals panel in the controversial and complex case was hailed as a victory by neighborhood leaders who had fought the State Department and the Taiwanese over what they saw as an intrusion on the residential character of Dupont Circle.

The court decision is also believed to be a boost, at least temporarily, for residential activists living in D.C. neighborhoods where an increasing number of foreign missions are locating. Leaders in such neighborhoods, particularly several upscale enclaves in Northwest Washington, claim that chanceries -- the office components of foreign missions -- have no place in the heart of a neighborhood because they erode an area's residential quality.

The Coordination Council for North American Affairs, the Taiwan group, can either appeal the court's decision or, as the court ordered, return to the D.C. Board of Zoning Adjustment for another hearing on the matter. In the meantime, it can continue to occupy the turn-of-the-century building at 1701 18th St. NW.

"The ultimate goal is to get the Taiwanese out of the building and stop the proliferation of chanceries in the neighborhood," said Cornish Hitchcock, president of the Dupont Circle Citizens Association, which brought the suit against the District government, the State Department and the Taiwan group.

"We won the first round, but there are a few more rounds to go," Hitchcock said.

The Taiwan group moved its offices into the 18th Street structure earlier this year. Dupont Circle activists hope to force the Taiwanese out of the building and have the attractive, four-story structure transformed into housing, the building's original use. Over the past 40 years, the structure has been home to various offices.

Taiwanese officials were unavailable for comment, and James Rowe, a Washington lawyer who represents them, declined to comment.

Ronald Mlotek, chief counsel for the State Department's Office of Foreign Missions, said that "neither the U.S. government nor the {Taiwanese} has reached a decision on which way to go.

"I'm not willing at this point to say I am disappointed," said Mlotek, whose office strongly supported the Taiwanese bid to locate in the building.

The basis of the Dupont Circle group's legal action was the District's zoning panel's original classification of the Taiwan organization as a general office and not as a chancery.

Such a distinction became a contentious point that grew increasingly muddled during the two-year debate. Making the classification decision even more confusing is that the United States no longer formally recognizes the Taiwan government.

Despite the diplomatic break, the Taiwanese, supported by the State Department, in late 1985 asked that their zoning case be treated as if it were a chancery application coming from a foreign government.

At that time, they based their claim on a letter from the State Department supporting the chancery request because of the Taiwan Relations Act of 1978, which, in part, gave the Taiwanese group certain immunities and privileges typically accorded to foreign missions.

But District zoning officials were unclear whether to call the Taiwan group's potential use of the building a chancery or regular office.

While such a classification may seem minor, the dilemma caused extensive debate at the January 1986 zoning hearings on the matter.

In addition, the 18th Street site was not specifically set aside by District zoning regulations as a place where foreign missions are allowed to locate as a matter of right.

A rigid zoning interpretation has been vehemently opposed by the State Department, which claims that foreign missions are discriminated against in their attempt to locate in the city.

As a result of the District's position on where chanceries can locate and the Dupont Circle residents' opposition to the Taiwanese proposal, the Taiwanese backed away from their position that they should be treated as a chancery.

Instead, with support from the State Department, they reasoned that they could go either way -- as a chancery or as a nonprofit general office. In either case, the group felt they could win zoning approval.

The District's planning department then softened its opposition, saying that it could support the Taiwan bid so long as it was deemed an office and not a chancery.

Dupont Circle residents were outraged, claiming that the word-choice battle was nothing more than zoning semantics.

Regardless of the classification that was embraced, neighborhood activists said the residential character of the Dupont Circle area would be further damaged if the Taiwanese were successful with their request.

The appeals court, in its recent decision, agreed with the citizens' group, and claimed that the District zoning panel should have considered the Taiwanese bid as a chancery application, not as a general office use.

It said the Taiwan group's attempt to call itself a chancery or a general office as a means to win approval before the zoning panel was "an anomalous interpretation {of the law} that would apply its provisions in a piecemeal fashion at the whim of {the Taiwanese}.

"The State Department understandably is concerned that any department endorsement of {Taiwan} as a chancery might be conceived as an implicit recognition of a diplomatic relationship between the governments of the United States and Taiwan and might thereby cause international repercussions," the court said in its ruling.

Nonetheless, the court said that while the State Department does not have to recognize the Taiwan building as a chancery, the District zoning panel must do so.

Hitchcock of the Dupont Circle group called the court's ruling important because it means a chancery can not selectively apply zoning laws to win approval to locate in a certain area.

"If it walks like a duck and talks like a duck, it must be a duck. In this case, it looked like a chancery and it was a chancery," he said.