SIOUX FALLS, S.D. (CN) – During her time as South Dakota’s lone congresswoman, Rep. Kristi Noem has long told a tale about the Internal Revenue Service’s crushing “death tax” on her farming and ranching family shortly after her father’s untimely death. But court documents suggest Noem’s story is less a tale of the taxman cometh, and more about bungled estate planning.
“Ron Arnold did a will in 1976, and never updated it between 1981 and 1994,” said Robert Lord, a Phoenix tax attorney who has looked at probate documents of Noem’s father. “Based on better estate planning and the law in 1994, Kristi Noem’s family could’ve and should’ve had zero tax liability.”
Over 130 pages of estate files – released for the first time Wednesday to a statewide public-access database and reviewed by Courthouse News and two tax attorneys – reveal Noem’s family not only could have avoided an estate tax in 1994 with a simple update to her father’s will, but also would not pay any inheritance tax if Ron Arnold died today.
As congressional Republicans push to reform the tax laws and further diminish the specter of the federal “death tax,” Noem has been telling her story to national media as an example of a greedy, overburdening tax system. To Fox News, she called the estate tax “immoral.” She told the Huffington Post her father “had done estate planning, he had had a will completed, but he hadn’t gotten it signed before he was killed.”
But documents tell a different story: Ron Arnold did possess a will, signed in 1976, which gave half his estate to his wife Corinne and the other half to a trust managed by his brothers. And had Arnold updated his will prior to his death in 1994 to take advantage of the 1981 spousal exemption, Noem’s family wouldn’t have paid a dime of federal estate tax.
Lord, the tax attorney, says the Kemp-Roth Tax Cut of 1981 allowed a 100 percent deduction if the estate passed to a spouse. Had Ron Arnold updated his will accordingly, his estate could have passed tax-free to his wife.
In a statement to Courthouse News, Noem said, “For a decade after a tragic farming accident took my dad’s life, the death tax impacted nearly every decision our family made. To allege anything else is fake news.”
Court records show Ron Arnold was the proverbial farmer: cash-poor, but asset- and land-rich. He had an old GMC pickup, $2,000 in a checking account, and a $26 IOU to a Christian movie-rental company based in Utah.
But he also owned 400 head of cattle and over $200,000 in grain inventory. He’d also started buying land in and around Hamlin and Codington counties in the late 1970s. By 1994 when he died, he and Corinne owned nearly 10,000 acres.
“He died young, and at that age he was building up the land,” said Ryan Cwach, a South Dakota tax attorney. “We should expect him to be carrying quite a bit of land and operational debt.”
Arnold had an estate worth over $2 million, with about two-thirds of that leveraged by expenses. And on the estate, Noem’s family did indeed face an estate tax liability of $169,858.
“I can tell you right off the bat that she paid those taxes,” Noem’s spokeswoman Brittany Comins said Wednesday.
How burdensome those taxes were relative other debt, according to the tax attorneys, is also debatable.
“It’s hard to believe this was as catastrophic financially as Rep. Noem claims,” Lord said.
Noem was just 22 years old, married and eight months pregnant when her father tragically died in a field accident. She dropped out of college, moved back home, and her battle over the next decade to save the farm from crippling debt at the hands of the estate tax and raise her family is the stuff of South Dakota legend.
A 2011 Sioux City Journal story noted voters responded to her “rags-to-riches” story. Noem swept to Congress in 2010 as part of the Tea Party wave after two terms in the South Dakota Legislature, defeating Democrat Rep. Stephanie Herseth Sandlin. She immediately became a young, popular, conservative congresswoman.
In a 2015 speech on the House floor, Noem spoke of the “death tax” bill her family got from the IRS.
“It wasn’t very long after he was killed that we got a bill in the mail from the IRS that said we owed them money because we had a tragedy that happened to our family,” Noem told her House colleagues. “We could either sell land that had been in our family for generations or we could take out a loan. So I choose to take out a loan but it took us 10 years to pay off that loan to pay the federal government those death taxes.”
As Capitol Hill debates the impending tax reform, Noem’s firsthand “death tax” fight has been called on again.
In an op-ed written for FoxNews.com, Noem – who is running for governor of South Dakota – called the estate tax “immoral.” And at least some press outlets have bought in: an article in the Pierre Capital Journal stated Noem was “under deep debt from taxes on her father’s estate.”
But property records on the estate inventory indicate Arnold bought much of the land when Noem was a child and was not “in the family” for more than a decade or so. Moreover, both Cwach and Lord point out Arnold’s death would’ve deferred tax obligations for at least six months and any estate tax liability could be deferred for an additional five years.
“The laws then and now were set up so families like Kristi’s would get favorable treatment,” said Cwach. “It’s tragic, but why Ron didn’t sign an amended will is a mystery.”
On Wednesday, Noem appeared with House Speaker Paul Ryan in an online press conference, and when Ryan asked Noem to share her own encounter with the tax, she mentioned she and her husband’s attempts to start a game lodge and tussle with small business taxes. She only brushed on the estate tax encounter, saying, “And when my dad died, we faced a lot of taxes, too.”
The recently released court records make clear, however, that Noem and her family had plenty of options after her father’s death. Both Lord and Cwach point out the IRS provides low-interest loans. Noem’s family chose to pay down some of the father’s farm debt, rather than the estate tax. The family didn’t apply for the special-use valuation to give the farm land preferential treatment come tax season. Moreover, her mother Corinne received $1.2 million from life insurance, and records suggest Corinne loaned $1 million to the residuary trust naming Noem and her three siblings as beneficiaries.
Both tax attorneys note estate tax laws have loosened up since 1994.
“Assuming both of Rep. Noem’s parents passed away in 2017 with simple wills and further assuming that he had the same 67 percent debt-to-equity ratio he did in 1994,” Cwach said. “It’s highly unlikely Noem would face a tax.”
In fact, Cwach projected that under current law if Noem’s parents both died today their estate would have to be about $35 million for any estate tax to be assessed.
In 1994, tax law allowed a $600,000 exemption for individuals; under current tax law, individuals receive a $5.49 million exemption and for couples it’s $11 million. The congressional plan fresh out of a House and Senate negotiation involving both Noem and South Dakota’s senior senator John Thune would allow a married couple to pass $22 million tax-free and far more with even modest planning.
And not everyone Noem represents shares her fear and loathing of the federal estate tax.
Donn Teske, president of the Kansas Farmer’s Union, is a multi-generation beef and cattle farmer who also raised dairy for 20 years.
“They’re paying off their damned donors,” Teske said in a phone interview, referring to politicians. “Hardly any farmers are affected by this estate tax. And if they are, well, they’ve got some wealth.”
Teske said he’s also concerned that by eliminating the estate tax, Congress will be forced to offset the lost revenue by repealing the stepped-up basis, an inheritance maneuver that allows inheritors of farmland to avoid capital gains taxes.
“Losing stepped-up basis for estate tax would much more dramatically hurt farmers,” he said.
The South Dakota Farm Bureau declined a request for its insight on the issue. Its parent organization, the American Farm Bureau, supports both a repeal of the estate tax and a continuation of the stepped-up basis Teske mentioned.
Only 15 states and the District of Columbia currently have an estate tax. No estate tax has been collected statewide in South Dakota since 2005. The state – in addition to friendly tax laws – is home to a $1 billion trust industry.
And loosening up dynastic tax regulations can be good, not only for the largest farm and ranch family estates and the many wealthy families who need only have a post office box in South Dakota to take advantage of the state’s friendly trust laws, but it’s also good for local business.
“Every time a beneficiary in one generation dies and the benefits pass to the next generation, the trust gets trimmed by 40 percent, which means the fees also get trimmed by 40 percent,” Lord said.
The tax documents from Hamlin County affirm Noem’s story that her family was affected by an estate tax, but also provide further details about the politician’s family’s finances, including that her father benefited from a $100,000 government loan through the Department of Agriculture.
Still, Rep. Noem is clearly sticking to her story.
As she eyes the governor’s office in Pierre in 2018, facing a Republican primary opponent in state attorney general Marty Jackley – who has already begun painting Noem as a Washington insider – her long-ago struggle as a farmer burdened by draconian taxes will remain a clarion call to her rural bona fides. On her campaign’s website, below the photograph of her in a baseball cap and flannel riding a horse, a text box reads: “While Kristi was taking college classes, her father was killed in a farming accident. She stepped up and helped the family farm. As the family was still suffering from their loss, they were hit with the death tax.”
That, according to her website, is why she got into politics.