Djalal told a differient story. After being released he went straight to the press, complaining that "I was a mere passenger, sitting in the back seat. If the officer had to arrest my car his duty was to proceed against my driver. All I did was to ask to be allowed to communicate with the State Department and I was told to 'Shut up you damned fool'. He [the police officer] called my wife a foreigner when she sought to protest. But my wife happens to be English and she speaks better English than the officer does.”

As news of the breach of diplomatic immunity tricked up the American chain of command a slew of apologies were issued, ranging from the local authorities all the way up to Secretary of State Cordell Hull.

The ruler of Iran, Reza Shah, freaked out when he learned of the incident. He (perhaps in overreaction) responded by recalling the entire embassy legation and severing diplomatic ties with the US.

At this point Secretary of State Hull essentially said "fine then," and responded by seizing all the personal property of the embassy and its staff. The menagerie of art, Persian rugs, expensive silverware and other prizes were sold off to the highest bidder in a week-long auction. Washington Post coverage of the spectacle crowed about how "Washington's 'best people' bid spiritedly for Iran treasures."

Present Day

Flash forward to present day and the lights are off again at the Iranian Embassy. The building is in a unique state of limbo; technically still property of the Iranian Government, it has been occupied by the State Department since 1980.

Because of legal complications and public perception issues, State can’t use taxpayer funds to maintain the embassy and they have been forced to developed a creative system of financial gymnastics to cover the bills. Iran still owns 11 buildings in the US, which the US government rents out to private businesses and individuals to pay for the Washington embassy.

Iran is not competely without representation in DC. They do have an "interest section" in the offices of the Pakistani Embassy that the Weekly Standard has described as "a cramped lobby underneath a staircase that keeps the rest of the Interest Section out of sight."

Related:

Cigars and Molotov Cocktails at the Cuban Embassy

Tunneling Under the Russian Embassy