Paul Kiel, ProPublica

Crow’s lawyer argues that Congress has no authority to probe the GOP donor’s generosity and that doing so violates a constitutional separation of powers between Congress and the Supreme Court.

Members of Congress say there are federal tax laws underlying their interest and a known propensity by the ultrarich to use their yachts to skirt those laws.

Tax data obtained by ProPublica provides a glimpse of what congressional investigators would find if Crow were to open his books to them. Crow’s voyages with Thomas, the data shows, contributed to a nice side benefit: They helped reduce Crow’s tax bill.

The rich, as we’ve reported, often deduct millions of dollars from their taxes related to buying and operating their jets and yachts. Crow followed that formula through a company that purported to charter his superyacht. But a closer examination of how Crow used the yacht raises questions about his compliance with the tax code, experts said. Despite Crow's representations to the IRS, ProPublica reporters could find no evidence that his yacht company was actually a profit-seeking business, as the law requires.

“Based on what information is available, this has the look of a textbook billionaire tax scam,” said Senate Finance Committee chair Ron Wyden, D-Ore. “These new details only raise more questions about Mr. Crow’s tax practices, which could begin to explain why he’s been stonewalling the Finance Committee’s investigation for months.”

Crow, through a spokesperson, declined to respond to ProPublica’s questions.

As ProPublica reported in April, Crow lavished gifts on Thomas for over 20 years, often in the form of luxury trips on Crow’s jet and yacht. One focus of the investigations is whether Crow disclosed his generosity toward Thomas to the IRS, since large gifts are subject to the gift tax. Another is whether Crow treated his trips with Thomas as deductible business expenses. (While the data sheds light on how Crow might have accounted for Thomas’ trips, there are no clear implications for Thomas’ own taxes, experts said.)

Crow’s entry into the world of superyacht owners came nearly 40 years ago. By 1984, his father, Trammell Crow, had forged his real estate fortune, and Harlan, then in his 30s, was taking an increasing role in the family business. That year, father and son worked together to erect the 50-story Trammell Crow Center in downtown Dallas. They also formed a company, Rochelle Charter Inc., with the purpose of leasing out their new yacht, the Michaela Rose.

ProPublica’s trove of IRS data, which contains tax information for thousands of wealthy individuals, includes both Harlan Crow and his parents, who filed jointly. The data shows his parents with a majority share in Rochelle Charter. After they both died, Harlan Crow took full control in 2014.

ProPublica’s data for the company runs from 2003 to 2015. Rochelle Charter reported losing money in 10 of those 13 years. Overall, the net losses totaled nearly $8 million, with about half flowing to Harlan Crow. By using those deductions to offset income from other sources, the Crows saved on taxes. (The wealthy often find ways to deduct the expense of a private jet; the records don’t make it clear whether Crow is doing so.)

For Crow, the tax breaks from his yacht were just one way he was able to achieve a lighter tax burden. The tax code is particularly friendly to commercial real estate titans, and Crow generally enjoyed low taxes during that same period: He paid an average income tax rate of 15%, according to the IRS data. It’s a rate typical of the very wealthiest Americans but lower than the personal federal tax rates of even many middle-income workers.

Crow’s biggest deduction from the Michaela Rose came in 2014, when, after the death of his mother, Crow decided to renovate the yacht. The interior needed updating to fit more contemporary notions of glamour (for one, less gold plating). The work was expensive: Crow’s tax information shows a $1.8 million loss from Rochelle Charter that year.

In order to claim these sorts of deductions, taxpayers must be engaged in a real business, one that’s actually trying to make a profit. If expenses dwarf revenues year after year, the IRS might conclude the activity is more of a hobby. That could lead to the deductions being disallowed, plus penalties. Nevertheless, the ultrawealthy often pass off their costly pastimes, like horse racing, as profit-seeking businesses. In doing so, they essentially dare the IRS to prove otherwise in an audit.

For a yacht owner to meet the legal standard of operating a for-profit business, said Michael Kosnitzky, co-chair of the private client and family office group at the law firm Pillsbury Winthrop, “You have to be regularly chartering the yacht to third parties at fair market value,” typically through an independent charter broker.

ProPublica interviewed around a dozen former crew members of the Michaela Rose, some of whom spent years aboard the ship, and none said they were aware of the boat ever being chartered. ProPublica also reviewed cruising schedules for three different years. According to the former staff and the schedules, use of the vessel appears to have been limited to Crow’s family, friends and executives of Crow’s company, along with their guests.

Moreover, in an attempt to trademark the name of his yacht, Crow struggled to provide evidence that he chartered his ship. In 2019, an attorney representing Rochelle Charter filed an application with the U.S. Patent and Trademark Office for the request. This required demonstrating commercial use of the name Michaela Rose. The attorney, of the law firm Locke Lord, wrote that the name was used for “yacht charter services for entertainment purposes” and as evidence attached a brochure.

“This magnificent yacht has cruised the oceans of the world with a graceful and gentle motion found only on the most superior seagoing vessels,” the pamphlet said, and it went on to extoll the vessel’s “fine, seakindly hull” and “mahogany paneled formal dining room” that seats 16. But it said nothing about chartering.

“Registration is refused because the specimen does not show the applied-for mark in use in commerce,” the USPTO’s attorney responded.

Crow’s attorney asked the USPTO to reconsider. The brochure was “provided by Applicant directly to its customers and potential customers,” he wrote. Wasn’t that enough?

When USPTO again refused, the attorney provided new evidence: screenshots of the websites superyachts.com and liveyachting.com. These show “links and references to yacht ‘Charter’ services offered in connection with Applicant’s MICHAELA ROSE mark,” the attorney wrote.

At this point, the USPTO agreed to approve the trademark, but the evidence was dubious. Hundreds of ships have profiles on superyachts.com whether they are available to charter or not. The LiveYachting page merely encouraged readers to contact a broker “for finding out if she could be offered for yacht charters.”

“Reviewing the file, it’s not clear to me that the yacht was actually offered for use in commerce in a way that would justify a trademark,” said Neel Sukhatme, a professor at Georgetown Law and visiting scholar with USPTO.

Since April, when the Senate Finance Committee first sent Crow a long list of questions about Thomas’ trips on his jet and yacht, Crow has refused to provide extensive answers. But last month, his attorney, Michael Bopp of the law firm Gibson Dunn, did shed some light on how his chartering business worked: Crow leased from himself. (Gibson Dunn is representing ProPublica pro bono in a case against the U.S. Navy.)

For Crow’s personal use of the Michaela Rose, including trips when the Thomases were guests, “charter rates … were paid to the Crow family entities” that owned the yacht, Bopp wrote in a letter to Wyden. The letter did not specify who, if anyone, paid when Crow’s friends, family or employees used the vessel or how he determined the charter rate. Crow’s spokesperson declined to clarify these details.

According to Bopp, then, whenever Crow used his yacht, Crow (or one of his businesses) would pay his own company, Rochelle Charter, and Rochelle Charter would put that down as revenue. On the other side of the ledger would go the considerable expenses of operating the yacht: maintenance, crew, fuel and other costs. If, at the end of the year, Rochelle Charter’s revenue from chartering exceeded those expenses, Crow would pay tax on that income.

But the taxes of the ultrawealthy often have an up-is-down quality. The clear incentive is to welcome losses, not profits. If, as happened most years for which ProPublica has data, Rochelle Charter’s expenses far exceeded revenue, Crow would save on taxes.

These sorts of arrangements “should be aggressively audited,” said Brian Galle, a professor at Georgetown Law and former federal prosecutor of tax crimes.

“Assuming that the uses of the yacht are mostly personal, Crow should not be able to take a deduction,” he said, calling “absurd” the idea that “the more personal use you get from the yacht, the more deduction you get to claim.”

Crow treated personal trips on his jet in a similar fashion, according to his attorney. Wealthy business owners often derive tax savings from their jets, since business-related flights are fully deductible, and the rich can often find ways to blend business and pleasure, as ProPublica has reported. The company that owns Crow’s jet is not in ProPublica’s data set, so it’s unclear if it reported net losses.

Bopp’s letter describes the standard way that jet owners account for nonbusiness guests: “Reimbursements at rates prescribed by law,” he wrote, were paid to the Crow business that owned his jet. The IRS has a “Standard Industry Fare Level” that jet owners use to calculate the value of a seat aboard a jet for any trip. The amount is roughly equivalent to the cost of a first-class commercial ticket, far below what it would actually cost to charter a jet.

The Senate investigation has also focused on an entirely different tax question: Given that Thomas’ trips on Crow’s jets and yachts could easily be valued in the hundreds of thousands of dollars, did Crow report them to the IRS as taxable gifts?

For each year that Crow gave gifts to someone that exceeded a certain threshold ($17,000 in 2023), he was required to file a gift tax return. That might or might not have resulted in a tax bill for Crow, depending on how much he’d already given to others over the course of his life. (The lifetime limit for total gifts is $12.9 million in 2023.)

But, according to Bopp’s letter, Crow didn’t consider the trips reportable. The gift tax, Bopp wrote, was created to prevent people from avoiding the estate tax by simply giving away assets before death. But Crow still owned his jet and yacht after hosting Thomas. “Value [was] not transferred out of the hosts’ taxable estates,” he argued. Therefore, no gift tax.

Tax experts told ProPublica, on the contrary, that these sorts of luxury trips should be analyzed as gifts.

Beth Kaufman, a partner with Lowenstein Sandler who specializes in estate planning and a veteran of the Treasury Department’s Office of Tax Policy, said she’d counseled clients on the issue. After one couple took their extended family on an exotic vacation, she said, she helped them calculate the reportable costs and file a gift tax return.

However, taxpayers rarely report these sorts of trips, experts said. One important factor is that the IRS has no way of knowing about gifts like these unless they happen to be uncovered in an audit. The agency has also signaled no interest in scrutinizing these kinds of interactions. In fact, experts weren’t aware of any audits related to gifts of this kind.

The result is a situation where, counterintuitively, the gift tax can be easier to avoid the richer the host is.

As explained in a recent paper by two law professors and a private practitioner, everyone agrees that giving $500,000 to a friend would necessitate filing a gift tax return for that amount. Using that $500,000 to buy an all-expense-paid yacht cruise for friends would be treated no differently. But if someone owns a luxury yacht and takes their friends on a cruise, the situation gets muddy. Crow’s attorney even argues there was no gift at all.

That “doesn’t square with fundamental notions of fairness,” said Bridget Crawford, one of the paper’s authors and a professor at Pace Law School.

How to apportion the costs for Crow and his guests is debatable, Crawford said. Crow might argue he would have gone on the cruise without his friends anyway, but at the very least, she said, some portion of the costs of the trip (e.g., the crew and food) should be allocated to his guests.

She and her co-authors urged Congress and the IRS to make it clear these sorts of gifts should be disclosed and provide guidelines for valuing them.

“A lot of these tax rules were developed in an era where there were a few millionaires and the tiniest number of billionaires,” Crawford said, “and now there are many. This is becoming a more visible problem.”

Last June, drawing on the largest trove of confidential American tax data that’s ever been obtained, ProPublica launched a series of stories documenting the key ways the ultrawealthy avoid taxes, strategies that are largely unavailable to most taxpayers. To mark the first anniversary of the launch, we decided to assemble a quick summary of the techniques — all of which can generate tax savings on a massive scale — revealed in the series.

1. The Ultra Wealth Effect

Our first story unraveled how billionaires like Elon Musk, Warren Buffett and Jeff Bezos were able to amass some of the largest fortunes in history while paying remarkably little tax relative to their immense wealth. They did it in part by avoiding selling off their vast holdings of stock. The U.S. system taxes income. Selling stock generates income, so they avoid income as the system defines it. Meanwhile, billionaires can tap into their wealth by borrowing against it. And borrowing isn’t taxable. (Buffett said he followed the law and preferred that his wealth go to charity; the others didn’t comment beyond a “?” from Musk.)

2. The $5 Billion IRA

Other billionaires used less conventional ways to avoid income, we found. Tech mogul Peter Thiel amassed a $5 billion Roth IRA, a type of account that shields income from taxes and is intended to help low- and middle-class savers prepare for retirement. Back in 1999, Thiel stuffed low-valued shares of the company that would become PayPal into the account, a maneuver tax lawyers said risked running afoul of IRS rules. (It’s not clear if the government ever challenged the move.) He set himself up to reap billions in untaxed gains. (Thiel did not respond to questions for the original article.)

3. The $1 Billion Parlor Trick: Turning High-Tax-Rate Trading into Low-Tax-Rate Income

Even when tech billionaires do show income on their tax return, they tend to pay relatively low income tax rates. That’s because of the type of income they have: Gains from long-term investments, such as from stock sales, are taxed at a lower rate. But what do you do if you’re making over $1 billion every year, and it’s largely from short-term trading? Do you just accept that you’ll pay the higher rate on all that income? As we reported this week, Jeff Yass, head of one of the most profitable firms on Wall Street, did not meekly accept this fate. Instead, his firm, Susquehanna International Group, found creative ways to transform the wrong sort of income into the right kind, generating tax savings that exceeded $1 billion over just six years. (Susquehanna declined to comment but in a court case that centered on similar allegations, it maintained that it complies with the law.)

4: The Magic of Sports Ownership: Make Money While (Legally) Reporting Losses

The tax code offers business owners a slew of methods to erase income through deductions, none more awesome than buying a sports team, as former Microsoft CEO Steve Ballmer did with the Los Angeles Clippers. It doesn’t matter whether the team is actually profitable and growing in value. It can still be a write-off. (In some cases, we found, owners could effectively deduct a given player’s contract not once, but twice. They’re allowed to take deductions comparable to those for factory equipment that loses value as it ages, even as teams almost inevitably gain in value.) That’s one reason owners tend to pay far lower tax rates than the athletes they employ, or even the people serving beer in the team’s stadium. In our story, we found a Clippers arena worker who made $45,000 a year and paid a higher tax rate than the billionaire Ballmer. (Ballmer said he pays the taxes he owes.)

5. Build, Drill and Save: The Real Estate and Oil Businesses Can Both Be Tax Havens

In certain industries, like real estate or oil and gas, the tax breaks are so plentiful that billionaires can erase their income entirely even as they grow richer. That’s how real estate developer Stephen Ross (who also happens to own the Miami Dolphins) went 10 years without paying any income tax. Ross said that he followed the law. Another mogul, this one in the oil business, managed to tap a near bottomless well of write-offs via one of the biggest oil spills in history. (The mogul’s representatives did not respond to requests for comment.)

6. Even a Billionaire’s Hobbies Can Pay Off at Tax Time

Deductions from hobbies and side projects, which the ultrawealthy can structure as businesses, are another fun option. For some billionaires, it’s race horses: We found that six owners of thoroughbreds at the 2021 Kentucky Derby had taken a combined $600 million in tax write-offs on their horse racing operations. For others, like Beanie Babies founder Ty Warner, it’s luxury hotels. The billionaire splurged on a couple of landmark Four Seasons locations and then went 12 years without paying any income tax. (Representatives for Warner did not respond to requests for comment.)

7. Think Your Taxes are Too High? Change the Tax Laws

Sometimes, it pays to fight for a new tax break. For the billionaires who contributed millions to Republican politicians, the payoff came in the form of Trump’s “big, beautiful tax cut” for passthrough businesses. We found the change sent $1 billion in tax savings in a single year to just 82 ultrawealthy households. Some business owners also boosted their savings with a trick: They slashed their own salaries and categorized the money instead as passthrough income.

8. Why Tech Billionaires Pay Less Than Hedge-Fund Managers

With so many options to reduce taxes, the richest Americans often manage low income tax rates. We analyzed the incomes and taxes of the country’s top 400 earners, those averaging over $110 million in income per year. Overall, the group paid relatively low rates, but certain segments (tech billionaires, heirs, private equity executives) stood out even within this elite population because they were able to draw on the sorts of techniques detailed above. (Also drawing on these techniques were wealthy politicians, like the governors of Colorado and West Virginia.)

9. Brother, Can You Spare a Stimulus Check?

But the real standouts were the billionaires who reported such low incomes that they qualified for government assistance. At least 18 billionaires received stimulus checks in 2020, because their tax returns placed them below the income cutoff ($150,000 for a married couple).

10. Trust This: How Wealthy Families Pass Billions to Heirs While Avoiding Taxes

The holes in the estate tax, we found, are even more remarkable. There are well-worn ways to make sure Uncle Sam doesn’t get his cut of a fortune being passed on to heirs, and the most common is through a trust. How common no one can say, but we found evidence that at least half of the nation’s 100 richest individuals had used estate-tax-dodging trusts. In another story,we followed three century-old dynasties down through the generations, showing how they used trusts to avoid taxes, so that a fortune could pass all the way from the original early 20th century tycoon to, for example, the great-great-granddaughter who recently collected $210 million before her 19th birthday.

Nikki Spretnak loved being an IRS agent. Being able to examine the books of different businesses gave her an intimate view of the economy. But over the years, she became more and more conscious of a chasm between the business owners she was auditing and herself. It wasn't so much that they were rich and she, a revenue agent in the IRS office in Columbus, Ohio, was not. It was that, when it came to taxes, they lived a privileged existence, one that she, a mere W-2 recipient, did not share.

Over the past year, along with a team of my colleagues at ProPublica, I’ve spent countless hours scrutinizing the tax information of thousands of the wealthiest Americans. Like Spretnak, I’ve seen behind the veil and witnessed the same chasm. Doing my own taxes in the past was never a thrill, but only this spring did I fully realize what a colorless and confined tax world I inhabit.

For me, and for most people, filing taxes is little more than data entry. I hold in my hand my W-2 form from my employer and dutifully peck in my wages. Next come the 1099 forms that list my earnings from dividends or interest, and again my finger gets to work. The IRS has a copy of these forms, too, of course, making this drudgery somewhat pointless. By the end of it, there, in black and white, is my income.

The financial reality of the ultrawealthy is not so easily defined. For one, wages make up only a small part of their earnings. And they have broad latitude in how they account for their businesses and investments. Their incomes aren’t defined by a tax form. Instead, they represent the triumph of careful planning by skilled professionals who strive to deliver the most-advantageous-yet-still-plausible answers to their clients. For them, a tax return is an opening bid to the IRS. It’s a kind of theory.

In that tax world, nearly anything is possible. Stephen Ross is one of the world’s most successful real estate developers, a billionaire many times over, the owner of the Miami Dolphins. Ross, a former tax lawyer, once praised tax law as a particularly “creative” endeavor, and he is a master of the craft. His tax returns showed a total of $1.5 billion in earnings from 2008 to 2017, but he didn’t pay a dime in federal income taxes during that time. How? By mining a mountain of losses he claimed for tax purposes, as ProPublica reported. Look at Ross’s “income” for any of those years, and you’ll see numbers as low as negative $447 million. (He told ProPublica he abides by the tax laws.)

Texas billionaire Kelcy Warren owns a massively profitable natural gas pipeline company. But in an orgy of cake eating and having, he’s able to receive hundreds of millions of dollars from his company tax-free while reporting vast losses to the IRS thanks to energy-industry and other tax breaks, his records showed. (Warren did not respond to our questions.)

Based on those reported “incomes,” both Ross and Warren received COVID stimulus checks in 2020. We counted at least 16 other billionaires (along with hundreds of other ultrawealthy people, including hedge fund managers and former CEOs) among the stimulus check recipients. This is just how our system works. It’s why, in 2011, Jeff Bezos, then worth $18 billion, qualified for $4,000 in refundable child tax credits. (Bezos didn’t respond to our questions.)

A recent study by the Brookings Institution set out with a simple aim: to compare what owners of privately held businesses say they earn with the income that appears on the owners’ tax returns. The findings were stark: “More than half of economic income generated by closely held businesses does not appear on tax returns and that ratio has declined significantly over the past 25 years.”

That doesn’t mean business owners are illegally hiding income from the IRS, though it’s certainly a possible contributor. There are plenty of ways to make income vanish legally. Tax perks like depreciation allow owners to create tax losses even as they expand their businesses, and real estate developers like Ross can claim losses even on appreciating properties. “Losses” from one business can also be used to wipe out income from another. Sometimes spilling red ink can be lots of fun: For billionaires, owning sports teams and thoroughbred racehorses are exciting loss-makers.

Congress larded the tax code with these sorts of provisions on the logic that what’s good for businesses is good for the economy. Often, the evidence for this broader effect is thin or nonexistent, but you can be sure all this is great for business owners. The Brookings study found that households worth $10 million or more benefited the most from being able to make income disappear.

This isn’t just about a divide between rich and poor. Take two people, each earning $1 million, one through salary, the other through their business. Though they may live in the same neighborhood and send their kids to the same private school, they do not share the same tax world.

Under the current system, said John Sabelhaus, a former Federal Reserve economist and one of the study’s authors, “if you’re getting a W-2, you’re a sucker.”

This basic divide is also apparent in how tax laws are enforced. To the IRS, the average worker is an open book, since all their income is disclosed on those W-2s and 1099s. Should they enter an errant number on their tax return, a computer at the agency can easily catch it.

But that’s generally not true for private businesses. Such companies are often tangles of interrelated partnerships that, like densely grown forest, can be hard to penetrate. Auditing businesses like these “certainly is a test of endurance,” said Spretnak, the former IRS agent.

If she managed to solve the puzzle of how income flowed from one entity to another, she moved on to a stiffer challenge. It didn’t matter if what she saw made her jaw drop. She had to prove that the business’s tax geniuses had exceeded even what the generous tax laws allowed them to do. Often, she found, they had. Making her findings stick against a determined and well-funded opponent was her final hurdle.

By the time Spretnak retired in 2018, the IRS had gone from merely budget-constrained to budget-starved. Thousands of skilled auditors like her have left, not to be replaced. Audits of the wealthy have plummeted. Business owners have still more reason to be bold.

On the other side of the chasm from the W-2er, there’s still another tax world, one that’s even more foreign than that of business income. It’s the paradise of unrealized gains, a place particularly enjoyed by the major shareholders of public companies.

If your company’s stock shoots up and you grow $1 billion richer, that increase in wealth is real. Banks will gladly lend to you with such ample collateral, and magazines will put you on their covers. But if you simply avoid selling your appreciated assets (that is, realizing your gains), you haven’t generated income and therefore owe no tax.

Economists have long argued that to exclude such unrealized gains from the definition of income is to draw an arbitrary line. The Supreme Court, as far back as 1940, agreed, calling the general rule of not taxing unrealized gains an “administrative convenience.”

From 2014 to 2018, the 25 wealthiest Americans grew about $400 billion richer, according to Forbes. To an economist, this was income, but under tax law, it was mere vapor, irrelevant. And so this group, including the likes of Bezos, Elon Musk and Warren Buffett, paid federal income taxes of about 3.4% on the $400 billion, ProPublica reported. We called this the group’s “True Tax Rate.”

Recently, the Biden administration took a major step toward the “True Tax Rate” way of seeing things. It proposed a Billionaire Minimum Income Tax for the ultrawealthy that would treat unrealized gains as income and tax them at 20%.

To say that the idea’s fate in the Senate is uncertain would probably be overstating its chances. It is nevertheless a landmark proposal. Instead of the usual talk of raising income tax rates on the rich, the Biden proposal advocates a fundamental rethinking.

In the tax system we have, billionaires who’d really rather not pay income taxes can usually find a way not to. They can bank their accumulating gains tax-free and deploy tax losses to wipe out whatever taxable income they might have. They can even look forward to a few thousand dollars here and there from the government to help them raise their kids or get through a national emergency.

You can think of efforts to change this system as a battle between the rich and everybody else. And sure, it is. But it’s also an effort to pull those other tax worlds down to the terra firma of the wage earner, to make it so a W-2 isn’t the mark of a sucker.