Income tax treaty treatment of US based interest income

[Learner1]

Hello,

I'm checking up to see if my understanding of the France-US income tax treaty is correct.
The taxpayer is a US greencard holder who has a permanent home in France, is living in France, and subject to income taxation by France. The taxpayer received more than $10,000 in interest from a US bank account, and my research has indicated the following.

Pursuant to income tax treaty Article 4 pg. 1:
"For the purposes of this Convention, the term "resident of a Contracting State" means any
person who, under the laws of that State, is liable to tax therein by reason of his domicile,
residence, place of management, place of incorporation, or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that State in respect only of income from sources in that State, or of capital situated therein."
It seems the taxpayer could be considered a resident of both countries, however pursuant to Article 4 pg. 4 (formerly pg. 3 in the original treaty):
"Where, by reason of the provisions of paragraphs 1 and 2, an individual is a resident of
both Contracting States, his status shall be determined as follows:
(a) he shall be deemed to be a resident of the State in which he has a permanent
home available to him; if he has a permanent home available to him in both Contracting
States, he shall be deemed to be a resident of the State with which his personal and
economic relations are closer (center of vital interests);"
It appears that the tax payer is for income tax treaty purposes a resident of France.

Pursuant to Article 11, pg. 1:
"Interest arising in a Contracting State and beneficially owned by a resident of the other
Contracting State shall be taxable only in that other State"
It appears that the taxpayer as a resident of France should not be taxed by the USA for the USA-sourced interest income.

Pursuant to article 29 pg. 2:
"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. For this purpose, the term “citizen” shall include a former citizen or long-term resident whose loss of such status had as one of its principal purposes the avoidance of tax (as defined under the laws of the United States), but only for a period of ten years following such loss.”
It appears that the saving clause would not apply to the taxpayer because the taxpayer is a greencard holder and not a US citizen.
I am therefore reasoning that the taxpayer does not pay US taxes on the US derived interest at all. In other words, it shouldn't be on the 1040 for taxation and then offset by a foreign tax credit from France.

I am now looking for the mechanics of how to report the above sentence to the IRS.
Looking at Section 301.6114-1(b)(8), I see the following requires form 8833 disclosure:
"For returns relating to taxable years for which the due date for filing returns (without extensions) is after December 15, 1997, that residency of an individual is determined under a treaty and apart from the Internal Revenue Code."
Does this apply to article 4 pg. 1? Because I am planning to file the taxpayer as a 1040. I believe article 4 pg. 1 affects the residency of this individual for IRS purposes, but rather for tax treaty purposes, but I want to check whether this 8833 disclosure is required for the specific above code.

When looking over the rest of section 301.6114-1(c), I'm not seeing anything waiving the reporting requirement for interest income.
I'm therefore concluding that perhaps I should leave the interest income off the 1040, but disclose via 8833 the amount of this interest income as well as the specific provisions of the tax treaty (article 4 pg. 4 and article 11, pg. 1) that exempt this interest income from US taxation.
Is this the correct way of doing it, or am I missing something in my research?

Lastly, I just want to comment that it's quite a mess reading through these income tax treaties because the IRS seems to post only the original outdated treaties as well as their subsequent protocols stating which paragraphs of the original treaties are being changed. It seems like a really weird format for people to do research because you have to switch between three different documents. Do any copies of these tax treaties exist in their current form or do we all have to "reverse engineer" them to see what they currently state?

Thanks in advance, I know this is a big post.

[BobKamman]

First, the word is pursuant.

Second, you tell us everything except what might be most important:  Of what country is the taxpayer a citizen?  Some of the treaty provisions are meant to exclude benefits for those from third countries. 

[Learner1]

The taxpayer isn't a citizen of either the USA or France. The taxpayer only holds a green card for the USA.

I'm confused policy-wise why a tax treaty would exclude a citizen of a third country if that third-country citizen were also a US lawful permanent resident. A resident alien of the USA (via the green card test) is taxed on world-wide like citizens are. Seems like that would be pretty unfair towards the resident alien.

[BobKamman]

Imagine you're the president of France.  Why would you want to negotiate a treaty that helps citizens of other countries, after you've already cut them a break by allowing them to live in France in the first place?  They can't vote for you.  Or let's say you're the United States president.  Why would you want to help out, for example, Chinese communists just because they have managed to afford a pad in Paris?  

[Learner1]

Okay, I understand your point. But I'm going to also add that this taxpayer owns real estate (a primary residence) in France and is liable to pay taxes to France because of the taxpayer's domicile in France. The taxpayer has been living there for years.

So under article 1 it indeed says,

"This Convention shall apply only to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention."

But it also states under article 4 pg. 1,

"For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that State in respect only of income from sources in that State, or of capital situated therein."

It doesn't seem to use citizenship of either country as a criterion in article 4. I think so far the argument is stronger that the taxpayer is a France resident because the green card test doesn't seem to be a factor.

Going further, actually, it says in article 4 pg. 2(a),

"a) France shall consider a U.S. citizen or an alien admitted to the United States for permanent residence (a "green card" holder) to be a resident of the United States for the purposes of paragraph 1 only if such individual has a substantial presence in the United States or would be a resident of the United States and not of a third State under the principles of subparagraphs (a) and (b) of paragraph 3."

So it actually seems for the purpose of this treaty the taxpayer is a France resident, and not even a US resident because while the taxpayer is a green card holder, the tax payer does not have a substantial presence in the USA, so I do acknowledge that I unnecessarily discussed the tiebreaker test in article 4 pg. 3 previously, so I apologize for including that information needlessly.

However, I do think there's a very strong case that this taxpayer is classified as a resident of France for the tax treaty's purposes, so I think the taxpayer is covered under the tax treaty.

Do you agree?

Because if so then I'd like to figure out whether I'm correct in excluding the US interest income from the tax payer's US tax return while disclosing the treaty position with an 8833.

[BobKamman]

I have no opinion because I don't know what other information you are being selective about, and I think it's appropriate for you to do your own research.  

[Learner1]

Let me rephrase then.

I'm confident enough that the taxpayer does not pay US tax on the interest income due to article 11, pg. 1 that I intend to file it this way.

Mechanically for the return do we leave the interest income off the 1040 return but disclose that this a treaty position on form 8833?

I've done a number of hours of research into this but I haven't found an answer for specifically how to report tax exempt interest income via the USA France treaty. I've seen some examples of some other returns taking a different treaty position where they left income off the return while disclosing it via the 8833, but as I said it was for a different treaty and a different income source (it was a boiler-plate form 8833 for a university's foreign students employed at that university to use).

[harvard]

@Learner1 if you don't mind could you please share how you proceeded with this case? Thanks!

[Terry53029]

I would think your client would receive a 1099int from the us bank, which should be reported on 1040 schedule B. If you believe it is not subject to us tax due to US-France treaty then back it out on 1040 schedule 1, and fill out the supporting statement. I would put "pursuant to US-France treaty article 11"

Just curious, you say client has been in France for years, what has he done on past returns.