                  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.
                                 - 2 -

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.
                                 - 3 -

     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.
                                - 4 -

      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.
                               - 5 -

           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
                               - 7 -

     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
                                - 9 -

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
                               - 10 -

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
                               - 11 -

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.
