Burnet v. Coronado Oil Gas Co

CourtUnited States Supreme Court
Citation52 S.Ct. 443,285 U.S. 393,76 L.Ed. 815
Docket NumberNo. 341,341
PartiesBURNET, Commissioner of Internal Revenue, v. CORONADO OIL & GAS CO
Decision Date11 April 1932

The Attorney General and Mr. Thomas D. Thacher, Sol. Gen., of Washington, D. C., for petitioner.

[Argument of Counsel from pages 393-395 intentionally omitted] Mr. David A. Richardson, of Oklahoma City, Okl., and Mr. Thomas P. Gore, of Washington, D. C., for respondent.

Messrs. Oscar E. Carlstrom, Atty. Gen., and Sveinbjorn Johnson, of Urbana, Ill., amici curiae.

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 min- erals, 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 (article 11, § 1) established 7a 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, sections 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 per cent., and under the second twelve and one-half per cent. 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, 42 S. Ct. 171, 66 L. Ed. 338.

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.

True it is, as stated in Group No. 1 Oil Corp. v. Bass, 283 U. S. 279, 282, 283, 51 S. Ct. 432, 433, 75 L. Ed. 1032, '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, 522, 46 S. Ct. 172, 174, 70 L. Ed. 384.

The opinion in Gillespie v. Oklahoma, supra, has often been referred to as the expression of an accepted principle. Metcalf & Eddy v. Mitchell, supra; Jaybird Mining Co. v. Weir, 271 U. S. 609, 613, 46 S. Ct. 592, 70 L. Ed. 1112; Northwestern Mut. Life Insurance Co. v. Wisconsin, 275 U. S. 136, 140, 48 S. Ct. 55, 72 L. Ed. 202; Heiner v. Colonial Trust Co., 275 U. S. 232, 234, 48 S. Ct. 65, 72 L. Ed. 256; Shaw v. Oil Corporation, 276 U. S. 575, 579, 48 S. Ct. 333, 72 L. Ed. 709; Panhandle Oil Co. v. State of Mississippi ex rel. Knox, 277 U. S. 218, 221, 222, 48 S. Ct. 451, 72 L. Ed. 857, 56 A. L. R. 583; Carpenter v. Shaw, 280 U. S. 363, 366, 50 S. Ct. 121, 74 L. Ed. 478; Willcuts v. Bunn, 282 U. S. 216, 229, 51 S. Ct. 125, 75 L. Ed. 304; Group No. 1 Oil Corp. v. Bass, supra; Indian Motorcycle Co. v. United States, 283 U. S. 570, 576, 51 S. Ct. 601, 602, 75 L. Ed. 1277; Choteau v. Burnet, 283 U. S. 691, 696, 51 S. Ct. 598, 75 L. Ed. 1353.

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, 26 S. Ct. 110, 59 L. Ed. 261, 4 Ann. Cas. 737, 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, 725, 19 L. Ed. 227; Collector v. Day, 11 Wall. 113, 20 L. Ed. 122; Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 584, 15 S. Ct. 673, 39 L. Ed. 759; Farmers' & Mechanics' Sav. Bank v. Minnesota, 232 U. S. 516, 527, 34 S. Ct. 354, 58 L. Ed. 706.

'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 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, 42 S. Ct. 171, 66 L. Ed. 338, should be overruled. Neither can stand as the law of this court consistently with the principles recently reaffirmed in Group No. 1 Oil Corporation v. Bass, 283 U. S. 279, 51 S. Ct. 432, 75 L. Ed. 1032.

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 Corporation 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 (pages 282, 283 of 283 U. S., 51 S. Ct. 432, 433):

'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 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, 48 S. Ct. 371, 72 L. Ed. 693; Forbes v. Gracey, 94 U. S. 762, 24 L. Ed. 313; Tucker v. Ferguson, 22 Wall. 527, 22 L. Ed. 805; see Weston v. Charleston, 2 Pet. 449, 468, 7 L. Ed. 481; Veazie Bank v. Fenno, 8 Wall. 533, 547, 19 L. Ed. 482. 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...

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