Why is FileStream not closed by XmlReader

You should be able to control this through XmlReaderSettings.CloseInput.

readerSettings.CloseInput = true;
using (XmlReader reader = XmlReader.Create(new FileStream(archivePath, FileMode.Open), readerSettings))
{
    // do work with the reader
}

Or, more concisely if you don't care about other reader settings:

using (XmlReader reader = XmlReader.Create(new FileStream(archivePath, FileMode.Open), new XmlReaderSettings() { CloseInput = true }))
{
    // do work with the reader
}

Have you tried this?

using(var stream = new FileStream(archivePath, FileMode.Open))
using(var reader = XmlReader.Create(stream, readerSettings))
{

}

I couldn't find anything in the documentation that explicitly stated that the XmlReader would call dispose on the underlying stream when it was disposed. Also, I always use it as shown above and I have never encountered a problem.

Browsing through reflector I also find no instances where it calls Dispose() on the stream when creating a XmlTextReaderImpl. The XmlTextReaderImpl does not implement Dispose() and its Close() method looks like this:

internal void Close(bool closeInput)
{
    if (this.parsingFunction != ParsingFunction.ReaderClosed)
    {
        while (this.InEntity)
        {
            this.PopParsingState();
        }
        this.ps.Close(closeInput);
        this.curNode = NodeData.None;
        this.parsingFunction = ParsingFunction.ReaderClosed;
        this.reportedEncoding = null;
        this.reportedBaseUri = string.Empty;
        this.readState = ReadState.Closed;
        this.fullAttrCleanup = false;
        this.ResetAttributes();
    }
}

You would need to keep track of the FileStream and the XmlReader. It's potentially dangerous for the XmlReader to close the underlying stream. In the case where the FileStream is used by multiple readers: if one of these readers were to close the stream this would cause the other readers to fail unexpectedly.

It's a bit of a pain since some stream readers and writers will close the underlying stream, while others don't. As a best practice I always close and dispose of the streams I open manually. This also helps mitigate some 'gotchas' with certain streams.
e.g. You need to dispose a GZipStream before calling .ToArray()