Burnet v. Coronado Oil & Gas Co.
285 U.S. 393 (1932)

Annotate this Case

U.S. Supreme Court

Burnet v. Coronado Oil & Gas Co., 285 U.S. 393 (1932)

Burnet v. Coronado Oil & Gas Co.

No. 341

Argued January 15, 1932

Reargued March 16, 1932

Decided April 11, 1932

285 U.S. 393




Lands granted by the United States to the State of Oklahoma for the support of common schools and dedicated to that purpose by the state constitution were leased by the State to a private company for extraction of oil and gas, the State reserving a part of the gross production, the proceeds of which were paid into the public school fund, and the lessee taking the remainder.


(1) The lease was an instrumentality of the State in the exercise of a strictly governmental function. P. 285 U. S. 398.

(2) Application of the federal income tax to he income derived from the lease by the leasee was therefore unconstitutional. Gillespie v. Oklahoma,257 U. S. 501, followed; Group No. 1 Oil Corp. v. Bass,283 U. S. 279, distinguished. Id.

60 App.D.C. 233; 50 F.2d 998, affirmed.

CERTIORARI, 284 U.S. 606, to review a judgment overruling a decision of the Board of Tax Appeals sustaining an income and excess profits tax, 14 B.T.A. 1214.

Page 285 U. S. 397

MR. JUSTICE McREYNOLDS delivered the opinion of the Court.

By the Enabling Act Congress required as a condition precedent to the admission of Oklahoma into the Union that her Constitution should make provision for common schools; and for their benefit, it granted certain lands to the state with the proviso that those valuable for minerals,

Page 285 U. S. 398

gas, and oil should not be sold prior to January 1, 1915, but might be leased. Act of June 16, 1906, 34 Stat. 267, 270, 272, 273. The State Constitution established a common school system and pledged her faith to preserve the lands so conveyed by the United States as a sacred trust, and to keep the same for the uses and purposes for which they were granted. The Legislature prescribed regulations for leasing and directing payment of the proceeds into the school fund. Oklahoma Comp.Statutes of 1921, §§ 9415, 9417, 9423.

In January, 1914, some of these lands were leased to the Coronado Oil & Gas Company; renewals followed in 1919. Under the first lease, the state received fifty percent, and, under the second, twelve and one-half percent, of the gross production of oil and gas. During the years here important, the lessee's entire income came from the sale of its portion of such output.

The Commissioner of Internal Revenue assessed income and excess profits taxes upon the corporation's net income for 1917, 1918, and 1919. The Board of Tax Appeals approved his action; the Court of Appeals, District of Columbia, ruled otherwise. The latter held that the lease to the Coronado Company was an instrumentality of the state for the utilization of lands dedicated to the support of public schools, and that to tax the fruits of the lease would burden her in the performance of the governmental function of maintaining such schools. This conclusion, it properly thought, was necessary under Gillespie v. Oklahoma,257 U. S. 501.

We are disposed to apply the doctrine of Gillespie v. Oklahoma strictly, and only in circumstances closely analogous to those which it disclosed. In principle, however, the present claim of exemption cannot be distinguished from the one presented in the earlier cause, and we adhere to the rule there approved.

Page 285 U. S. 399

True it is, as stated in Group No. 1 Oil Corp. v. Bass,283 U. S. 279, 283 U. S. 282, 283 U. S. 283,

"This Court has consistently held that, where property or any interest in it has completely passed from the government to the purchaser, he can claim no immunity from taxation with respect to it merely because it was once government owned, or because the sale of it effected some government purpose. . . . Property which has thus passed from either the national or a state government to private ownership becomes a part of the common mass of property, and subject to its common burdens."

And, as there distinctly indicated, the exemption claimed by the Oil Corporation was denied because, under the settled rule applied by the Texas Supreme Court, the oil and gas from disposal of which the corporate income arose had been purchased, not obtained under a lease -- title had passed out of the state by a present sale. Status of the title was matter for determination under laws of the state as construed and applied by her courts. In the present cause, there is no basis for saying that, according to the local law, the transaction between the state and the lessee amounted to a sale. The distinction between cases involving sales and those where leases had been made seemed sufficiently apparent when Group No. 1 Oil Corp. v. Bass was decided, and is not less obvious now.

"Just what instrumentalities of either a state or the federal government are exempt from taxation by the other cannot be stated in terms of universal application. But this court has repeatedly held that those agencies through which either government immediately and directly exercises its sovereign powers are immune from the taxing power of the other."

Metcalf & Eddy v. Mitchell,269 U. S. 514, 269 U. S. 522.

The opinion in Gillespie v. Oklahoma, supra, has often been referred to as the expression of an accepted principle.

Page 285 U. S. 400

Metcalf & Eddy v. Mitchell, supra; Jaybird Mining Co. v. Weir,271 U. S. 609, 271 U. S. 613; Northwestern Mut. Life Insurance Co. v. Wisconsin,275 U. S. 136, 275 U. S. 140; Heiner v. Colonial Trust Co.,275 U. S. 232, 275 U. S. 234; Shaw v. Oil Corporation,276 U. S. 575, 276 U. S. 579; Panhandle Oil Co. v. Knox,277 U. S. 218, 277 U. S. 221, 277 U. S. 222; Carpenter v. Shaw,280 U. S. 363, 280 U. S. 366; Willcuts v. Bunn,282 U. S. 216, 282 U. S. 229; Group No. 1 Oil Corp. v. Bass, supra; Indian Motorcycle Co. v. United States,283 U. S. 570, 283 U. S. 576; Choteau v. Burnet,283 U. S. 691, 283 U. S. 696.

When Oklahoma undertook to lease her public lands for the benefit of the public schools she exercised a function strictly governmental in character. Consequently, South Carolina v. United States,199 U. S. 437, much relied upon, is not in point.

The states are essential parts of the plan adopted by the Federal Constitution, and we accept as settled doctrine that the United States can lay no tax upon their governmental instrumentalities. Texas v. White, 7 Wall. 700, 74 U. S. 725; Collector v. Day, 11 Wall. 113; Pollock v. Farmers' Loan & Trust Co.,157 U. S. 429, 157 U. S. 584; Farmers' & Mechanics' Sav. Bank v. Minnesota,232 U. S. 516, 232 U. S. 527.

"It is an established principle of our constitutional system of dual government that the instrumentalities, means and operations whereby the United States exercises its governmental powers are exempt from taxation by the states, and that the instrumentalities, means and operations whereby the states exert the governmental powers belonging to them are equally exempt from taxation by the United States."

Indian Motorcycle Co. v. United States, supra. Each government is supreme in its sphere, and, in order to preserve our dual system, this fact must be given practical recognition.

Here, the lease to the respondent was an instrumentality of the state for the purpose of carrying out her duty in respect of public schools. To tax the income of the lessee

Page 285 U. S. 401

arising therefrom would amount to an imposition upon the lease itself.

The challenged judgment must be affirmed.


MR. JUSTICE STONE, dissenting.

I think the judgment below should be reversed, and Gillespie v. Oklahoma,257 U. S. 501, should be overruled. Neither can stand as the law of this court consistently with the principles recently reaffirmed in Group No. 1 Oil Corp. v. Bass,283 U. S. 279.

The state of Texas, like the state of Oklahoma, has set apart a portion of its public domain for educational purposes. It has granted oil and gas leases of these lands not differing in any material respect from the Oklahoma lease involved in this case. The royalties received by the state from the leases are devoted to the University of Texas, as Oklahoma devotes the income derived from its leases to its public schools. In Group No. 1 Oil Corp. v. Bass, supra, decided less than a year ago, this court, notwithstanding its decision in the Gillespie case that the income of the lessees of Indian oil lands could not be taxed by Oklahoma, upheld the right of the national government to assess and collect a tax upon the income received by the lessee of one of the Texas leases from the sale of oil produced from the leased land. It was pointed out that, under Texas law, the lessee, by virtue of his lease, became the owner of the oil underground, and that the taxed income was derived from the sale of oil which was his own property. In upholding the tax, the court said (pp. 283 U. S. 282-283):

"Property sold or otherwise disposed of by the government, either state or national, in order to raise revenue for government purposes, is, in a broad sense, a government instrumentality, with respect to which neither the

Page 285 U. S. 402

property itself before sale nor its sale by one government may be taxed by the other. But it does not follow that the same property in the hands of the buyer, or his use or enjoyment of it, or the income he derives from it, is also tax immune. New Brunswick v. United States,276 U. S. 547; Forbes v. Gracey,94 U. S. 762; Tucker v. Ferguson, 22 Wall. 527; See Weston v. Charleston, 2 Pet. 449, 27 U. S. 468; Veazie Bank v. Fenno, 8 Wall. 533, 75 U. S. 547. Theoretically, any tax imposed on the buyer with respect to the purchased property may have some effect on the price, and thus remotely and indirectly affect the selling government. We may assume that, if the property is subject to tax after sale, the governmental seller will generally receive a less favorable price than if it were known in advance that the property in the hands of later owners, or even of the buyer alone, could not be taxed."

"But the remote and indirect effects upon the one government of such a nondiscriminatory tax by the other have never been considered adequate grounds for thus aiding the one at the expense of the taxing power of the other. See Willcuts v. Bunn,282 U. S. 216, 282 U. S. 231; Educational Films Corp. v. Ward,282 U. S. 379; Metcalf & Eddy v. Mitchell,269 U. S. 514, 269 U. S. 523, 269 U. S. 524. This Court has consistently held that, where property or any interest in it has completely passed from the government to the purchaser, he can claim no immunity from taxation with respect to it, merely because it was once government owned, or because the sale of it effected some government purpose. New Brunswick v. United States, supra; Forbes v. Gracey, supra; Tucker v. Ferguson, supra; see Gromer v. Standard Dredging Co.,224 U. S. 362, 224 U. S. 371; Choctaw, O. & G. R. Co. v. Mackey,256 U. S. 531, 256 U. S. 537; Central Pacific R. Co. v. California,162 U. S. 91, 162 U. S. 125; Railroad Co. v. Peniston, 18 Wall. 5, 85 U. S. 35-37; Weston v. Charleston, supra, p. 27 U. S. 468. "

Page 285 U. S. 403

"Property which has thus passed from either the national or a state government to private ownership becomes a part of the common mass of property and subject to its common burdens. Denial to either government of the power to tax it, or income derived from it, in order to insure some remote and indirect antecedent benefit to the other would be an encroachment on the sovereign power to tax not justified by the implied constitutional restriction. See Weston v. Charleston, supra, p. 27 U. S. 468."

The doctrine thus announced was not a new one. More than fifty years before, and long before the decision in the Gillespie case, it had been definitely decided in Forbes v. Gracey,94 U. S. 762, that private mining claims granted by the government in the public lands of the United States, and the ores and minerals derived from them, are subject to state taxation.

In deciding the Group No. 1 Oil Corp. case, it was not necessary to determine whether the result in that case would have been different if the oil, from the sale of which the taxpayer derived his income, had become his only when severed from the soil, or whether there were other distinguishing features between that case and the Gillespie case. It was enough, there, that, as the taxed income was derived from the lessee's sale of the oil, title to which was, by the lease, vested in him before severance, the case was definitely controlled by precedents whose avowed principles the court approved. Now, we are concerned with a lease identical with that involved in the Gillespie case, and comparison of it with the Texas lease is unavoidable. If we can find no distinction of substance between the operation and effect of the Texas leases and the Oklahoma leases, the Gillespie case should no longer be followed. That no such distinction can be drawn is obvious.

The leasing by the national government of Indian oil lands in Oklahoma to private lessees, for the benefit of the

Page 285 U. S. 404

Indians, and the leasing by Oklahoma of its school lands in like fashion, for the benefit of the schools of the state, are no more and no less governmental enterprises than the leasing by Texas of its oil lands for the benefit of the state university. Whatever the genesis of the particular public duty which each sovereignty has undertaken to perform, the method chosen and the instruments selected for its performance are the same. In each case, there was the exercise of a function concededly governmental; but, in each, the only result, so far as the lessee was concerned, was the acquisition by him of certain property rights exclusively for his own benefit. In each, the lessee was taxed on his profits, derived from his private business in the production and sale of oil and gas, which was his property. It cannot be said that the identical tax, thus levied, has any effect on Oklahoma differing from that on Texas. The fact, if it is a fact, that, under the Oklahoma leases, the lessees do not acquire ownership of the oil or gas until they have severed it from the soil, but before its sale, while the lessees under the Texas leases acquire it immediately on receipt of their leases, presents no distinguishing feature. All acquire private rights by governmental grant, from the exploitation of which they have derived income which, upon principles consistently applied by this court, except in the Indian oil lease cases, and reiterated in the Group No. 1 Oil Corp. case, may be taxed as other income is taxed.

Since comparison of the two methods of disposing of state assets reveals only formal differences, this court must now deal with an irreconcilable conflict in the theories upon which two of its decisions rest. One, the Gillespie case, extends the doctrine of tax immunity, beyond any other case, to income from private business enterprises, merely because the property used in the business was acquired from a sovereign government which applies

Page 285 U. S. 405

the proceeds of it to a governmental purpose. The other, and more recent, case, decided by the court after full consideration of all the arguments now advanced as supporting the Gillespie case, restricted the immunity to the property of the sovereign government itself, and to the income which the government derives from it.

It is plain that, if we place emphasis on the orderly administration of justice, rather than on a blind adherence to conflicting precedents, the Gillespie case must be overruled. It is true that, for ten years, the state of Oklahoma has been deprived, by the decision in that case, of taxes upon the income derived from private business of lessees of Indian lands in that state, but that is no reason why it should continue to be so deprived, or why the national government should now be denied the right to like taxes, and, at the same time, be permitted to tax the income of the lessees under the Texas leases. No interest which could be subserved by so rigid an application of stare decisis is superior to that of a system of justice based on a considered and consistent application of the Constitution of the United States.



Under the rule of Gillespie v. Oklahoma, vast private incomes are being given immunity from state and federal taxation. I agree with MR. JUSTICE STONE that that case was wrongly decided, and should now be frankly overruled. Merely to construe strictly its doctrine will not adequately protect the public revenues. Compare Jaybird Mining Co. v. Weir,271 U. S. 609.

Stare decisis is not, like the rule of res judicata, universal inexorable command.

"The rule of stare decisis, though one tending to consistency and uniformity

Page 285 U. S. 406

of decision, is not inflexible. Whether it shall be followed or departed from is a question entirely within the discretion of the court, which is again called upon to consider a question once decided."

Hertz v. Woodman,218 U. S. 205, 218 U. S. 212. Stare decisis is usually the wise policy, because, in most matters, it is more important that the applicable rule of law be settled than that it be settled right. Compare National Bank v. Whitney,103 U. S. 99, 103 U. S. 102. This is commonly true even where the error is a matter of serious concern, provided correction can be had by legislation. [Footnote 1] But in cases involving the Federal

Page 285 U. S. 407

Constitution, where correction through legislative action is practically impossible, this court has often overruled its earlier decisions. [Footnote 2] The court bows to the lessons

Page 285 U. S. 408

of experience and the force of better reasoning, [Footnote 3] recognizing that the process of trial and error, so fruitful in the physical sciences, is appropriate also in the judicial function. Compare 281 U. S. S. 409

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