T.C. Summary Opinion 2010-150
UNITED STATES TAX COURT
LISA HAMILTON SAVARY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6839-09S. Filed October 6, 2010.
Thomas L. Severance, for petitioner.
Thomas A. Dombrowski, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
year in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a deficiency in petitioner’s 2005
Federal income tax of $4,064 and an accuracy-related penalty of
$812.80 under section 6662(a).
The issues for decision are:
(1) Whether, pursuant to an income tax convention between
the United States and France, the United States is precluded from
taxing petitioner, a U.S. citizen but resident of France, on all
or a portion of her income;
(2) whether petitioner is entitled to exclude all or a
portion of her income under section 911;
(3) whether petitioner is entitled to a credit under section
901 for all or a portion of the taxes paid to France; and
(4) whether petitioner is liable for the accuracy-related
penalty under section 6662.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts, supplemental stipulation of facts, second supplemental
stipulation of facts, and accompanying exhibits.
Petitioner resided in Paris, France, when the petition was
filed.
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Petitioner is a U.S. citizen who was born in the State of
North Carolina. Since 1999 petitioner has worked for United
Airlines as a flight attendant based out of Charles de Gaulle
airport (CDG) in Paris, France. In 2003 petitioner married
Fabien Savary (Mr. Savary), a French citizen. Petitioner and Mr.
Savary established a home in Paris and have two children
together. During 2005 petitioner was registered to vote in
France, held other registrations in France, and received all of
her mail at her home in Paris. Petitioner did not have a
residence in the United States.
Petitioner received wages of $37,737.81 for her work as a
flight attendant for United Airlines in 2005. During that year
petitioner worked on approximately 39 flights departing from CDG,
flying through international airspace, and landing in a gateway
city located within the United States.
For 2005 petitioner paid income tax to France on the total
amount of her wages from United Airlines, including the portion
allocable to her services in the United States and in
international airspace.
Petitioner timely filed her 2005 Federal income tax return
reporting wages of $37,737.81. Attached to petitioner’s tax
return was a Form 2555, Foreign Earned Income, on which
petitioner excluded $32,737.81 of her income as foreign earned
income.
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In a notice of deficiency respondent disallowed the
exclusion claimed by petitioner for foreign earned income.
Respondent also determined that petitioner is liable for an
accuracy-related penalty under section 6662(a).
Discussion2
A. Exclusion of Income Under the Convention
Petitioner contends that none of her income for the year in
issue is subject to Federal income tax pursuant to the United
States-France Convention for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion With Respect to Taxes on Income
and Capital, Aug. 31, 1994, 1963 U.N.T.S. 67, Tax Treaties (CCH)
par. 3001, hereinafter sometimes referred to as the United
States-France Convention or Convention. Petitioner specifically
cites Article 15, paragraph 3, which provides:
Notwithstanding the preceding provisions of this
Article, remuneration derived by a resident of a
Contracting State in respect of an employment exercised
as a member of a regular complement of a ship or
aircraft operated in international traffic shall be
taxable only in that State.
Respondent contends that petitioner’s income remains subject
to Federal income tax pursuant to Article 29, paragraph 2, of the
Convention, commonly known as the saving clause. As relevant
herein, Article 29, paragraph 2 provides:
2
We decide this case without regard to the burden of
proof.
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Notwithstanding any provision of the Convention
except the provisions of paragraph 3, the United States
may tax its residents, as determined under Article 4
(Resident), and its citizens as if the Convention had
not come into effect.
“Although many foreign countries tax their residents on
their worldwide income, the United States taxes its citizens, as
well as its residents, on their worldwide income.” Filler v.
Commissioner, 74 T.C 406, 410 (1980) (emphasis added).
Accordingly, the United States insists on the inclusion of a
saving clause in its tax treaties and conventions. Id. The
effect of a saving clause is “to reserve the right of the United
States to tax its citizens and residents on the basis of the
provisions of the Internal Revenue Code without regard to the
provisions of the treaty [or convention].” Id.
Paragraph 3 of Article 29 of the United States-France
Convention provides that certain articles of the Convention take
precedence over the saving clause, but Article 15 is not among
those provisions. Accordingly, petitioner is not entitled to
exclude her entire income earned as a flight attendant for United
Airlines pursuant to Article 15, paragraph 3, of the Convention,
and her income is taxable under the provisions of the Internal
Revenue Code. See Filler v. Commissioner, supra at 410.
B. Foreign Income Exclusion Under Section 911
Section 911(a) allows a “qualified individual” to exclude
from gross income “foreign earned income”. A qualified
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individual is a U.S. citizen whose tax home is in a foreign
country if that individual is a bona fide resident of a foreign
country for an uninterrupted period that includes an entire
taxable year. Sec. 911(d)(1). “Bona fide residence in a foreign
country * * * for an uninterrupted period may be established,
even if temporary visits are made during the period to the United
States or elsewhere on vacation or business.” Sec. 1.911-2(c),
Income Tax Regs. Foreign earned income is “the amount received
by such individual from sources within a foreign country * * *
which constitute earned income attributable to services performed
by such individual”. Sec. 911(b)(1)(A).
Petitioner has resided in Paris, France, continuously since
1999. In 2003 petitioner married Mr. Savary, and together they
established a home in Paris. In 2005 petitioner lived with her
husband in their home in Paris, and she also held registrations
and voted in France. All of the time that petitioner was in the
United States during 2005 was related to her duties as a flight
attendant for United Airlines. Therefore, in 2005 petitioner was
a bona fide resident of France and not a resident of the United
States.
Section 911 does not define “foreign country”. However, one
of its implementing regulations, section 1.911-2(h), Income Tax
Regs., does:
(h) Foreign country.--The term “foreign country”
when used in a geographical sense includes any
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territory under the sovereignty of a government other
than that of the United States. It includes the
territorial waters of the foreign country (determined
in accordance with the laws of the United States), the
air space over the foreign country, and the seabed and
subsoil of those submarine areas which are adjacent to
the territorial waters of the foreign country and over
which the foreign country has exclusive rights, in
accordance with international law, with respect to the
exploration and exploitation of natural resources.
This Court has held that international waters are not a
“foreign country” and that income earned while traveling in
international waters is not “foreign earned income” excludable
from gross income under section 911. Clark v. Commissioner, T.C.
Memo. 2008-71. Likewise, in Rogers v. Commissioner, T.C. Memo.
2009-111, this Court held that international airspace is also not
a “foreign country” for purposes of section 911 and income earned
while working in international airspace is not “foreign earned
income” and must be included in income.
The parties stipulated that 38.2 percent of petitioner’s
income from United Airlines for 2005 was earned in or over
foreign countries. Such income is therefore excludable as
foreign earned income. The remaining portion of petitioner’s
income was earned while in the United States or in international
airspace and is therefore includable in gross income.
Accordingly, petitioner is entitled to an exclusion from income
of $14,415.84 under section 911.
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C. Foreign Tax Credit Under Section 901
As previously discussed, the saving clause in Article 29,
paragraph 3, of the United States-France Convention, takes
precedence over Article 15; however, it does not affect the
Convention rules on relief from double taxation found in Article
24. However, a fair reading of Article 24 of the Convention
indicates that petitioner is entitled to a tax credit from
France, and not the United States, in respect of income received
from sources within the United States (U.S. source income).
Under paragraph 1(a) of Article 24 of the Convention, “the
United States shall allow to a citizen * * * of the United States
as a credit against the United States income tax: (i) the French
income tax paid by or on behalf of such citizen”. The Treasury
Department Technical Explanation of the United States-France
Convention for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and
Capital Signed at Paris on August 31, 1994, Tax Treaties (CCH)
par. 3060, explains that the credit against U.S. tax is to be
limited to the amount of U.S. tax due with respect to net foreign
source income.
Paragraph 1(b) of Article 24 of the Convention provides that
for “an individual who is both a resident of France and a citizen
of the United States: (i) the United States shall allow as a
credit against the United States income tax the French income tax
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paid” after certain credits which are not applicable on the facts
of this case. The Treasury Department Technical Explanation
explains that where U.S. tax is due solely by reason of
citizenship, then the United States will allow a credit for
French tax imposed on the basis of residence. Here, most of
petitioner’s income is taxable in the United States not merely
because she is a citizen, but rather because such income is U.S.
source income earned while working in the United States or in
international airspace.
The Convention further provides in paragraph 2(a) of Article
24 that for
Income arising in the United States that may be
taxed or shall be taxable only in the United States in
accordance with the provision of this Convention shall
be taken into account for the computation of the French
tax where the beneficiary of such income is a resident
of France * * *. In that case, the United States tax
shall not be deductible from such income, but the
beneficiary shall be entitled to a tax credit against
the French tax.
Article 3, paragraph 2, of the Convention also provides that a
term not otherwise defined is to “have the meaning which it has
under the taxation laws of that State.” Id. This provision
would appear to require use of the U.S. source of income rules,
at least where a treaty or convention fails to adequately define
the source of the income, as is the case here. Filler v.
Commissioner, 74 T.C. at 413. Thus, it seems clear that in
Article 24 of the Convention, the United States consented only to
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provide a foreign tax credit on income attributable to sources in
France, as determined under the source of income rules of the
Internal Revenue Code, and not to U.S. source income. See Filler
v. Commissioner, supra at 413. At the same time, France
consented to provide a tax credit against French taxes for U.S.
income taxes on U.S. source income. See id.
Because we have already held that petitioner is entitled to
exclude such part of her income that is attributable to sources
in France, she is not entitled to a credit for U.S. tax payable
on such foreign source income. The remaining portion of
petitioner’s income, as discussed supra, is U.S. source income
and is therefore not eligible for a credit for foreign tax paid.
Accordingly, petitioner is not entitled to a foreign tax credit
under section 901.
Finally, it would appear that under the Convention relief
from double taxation is available here only as a credit against
the French tax. We are aware that petitioner has already sought
such relief and that it was denied by the French authorities in
reliance on Article 15, paragraph 3, of the United States-France
Convention. But we think that they erred in this respect, as
more fully explained above. Petitioner may be able to seek
reconsideration by the French authorities in the application of
their own law. See Filler v. Commissioner, supra at 413. And as
a last resort, petitioner may be able to present her case to the
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French competent authority in accordance with the United States-
France Convention, Article 26, Mutual Agreement Procedure, of
which paragraph 1 provides
Where a person considers that the actions of one
or both of the Contracting States result or will result
in taxation not in accordance with the provisions of
this Convention, he may, irrespective of the remedies
provided by the domestic law of those States, present
his case to the competent authority of the Contracting
State of which he is a resident or national. The case
must be presented within three years of the
notification of the action resulting in taxation not in
accordance with the provisions of this Convention.
See also Filler v. Commissioner, supra at 413.
D. Accuracy-Related Penalty Under Section 6662
Section 6662(a) and (b)(1) imposes a penalty equal to 20
percent of the amount of any underpayment attributable to
negligence or disregard of rules or regulations. The
Commissioner bears the burden of production with respect to the
accuracy-related penalty. See sec. 7491(c); Higbee v.
Commissioner, 116 T.C. 438, 446 (2001).
We hold that respondent has not met his burden of
production. Accordingly, petitioner is not liable for the
accuracy-related penalty under section 6662(a).
Conclusion
We have considered all of the arguments made by the parties,
and, to the extent that we have not specifically addressed them,
we conclude that they are without merit.
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To reflect the foregoing,
Decision will be entered
under Rule 155.