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Nelson rolls along despite toll of IRS debt

Pete Szilagyi

Day in and day out, on the road again or at home in Austin, another $5,516 in penalties and interest is added to the income tax bill of WillieNelson.

So far, he owes about $17 million, an amount that would send the average person staggering to bankruptcy court. But not the laid-back country singer, who says he is unhappy but not intimidated about his debt and the Internal Revenue Service raids in November that seized the rewards of 15 years as one of America's best-known entertainers.

Nelson returned to Austin recently after several weeks in Hawaii observing from afar the fallout from the highly publicized IRS seizures, which included real estate in six states and his Lake Travis hilltop home, movie ranch and the studio in which he has recorded dozens of familiar songs.

In an interview with the Austin American-Statesman last week, Nelson broke a long silence to discuss his protracted battle with the IRS, a $95 million suit he has filed against the Price Waterhouse & Co. accounting firm, and his future plans.

Nelson, 57, also poked fun at a recent National Enquirer cover story that portrayed him as homeless, destitute and suicidal.

"That's some of the best reading I've had in a long time - 99 percent of it is bull, " Nelson said after several tiring hours in front of the cameras for the CBS-TV movie Another Pair of Aces, in which he will co-star with Kris Kristofferson.

"I don't worry about money — fortunately I never did. This (tax) situation is actually kind of comical to me. I laugh when I think about how much it wasn't my fault, " Nelson said.

Nelson's friend and golfing partner, comedian Turk Pipkin, said it's "not like he's concerned because he wasn't trying to pay it. He's missing that normal guilt that comes with bankruptcy or tax stuff because he's still making money and still trying to pay it. He just says, 'What the hell.' "

The singer is staying at the Lake Travis vacation home of Dallas Honda dealer Bill McDavid or aboard one of his leased tour buses, Honeysuckle Rose II. The California movie company also has provided Nelson, his companion Annie D'Angelo and their two children with a suite at the Stouffer Arboretum hotel during filming this month.

Nelson and his high-profile New York attorney, Jay Goldberg, who lists Donald Trump as a client, say the entertainer has kept current on his income taxes since 1983, paying $8 million to the IRS for the years 1983-89. The unpaid taxes that led to the raids on Nelson's properties were from the late '70s and early '80s, when Billboard's charts were heavy with Nelson's albums, and he was on the cover of Newsweek and Rolling Stone and earning millions from royalties and sold-out concerts.

The IRS sued Nelson for the unpaid taxes, and last June the singer and the tax agency mutually agreed that he would pay $6.5 million in back taxes and about $10 million in penalties and interest, which the IRS says continue to accrue.

Nelson's legal advisers acknowledge that the IRS and Nelson, through the years, have disagreed on numerous deductions he has claimed as business expenses. But they blame the majority of his tax debt on what they say were disastrous investments Nelson made in cattle operations and federal home loan mortgage forward contracts, similar to futures contracts.

The singer said the investments were proposed and handled by Price Waterhouse, which he hired in 1979 to oversee his investments and file his taxes. The mortgage securities and cattle investments were intended to shelter some of Nelson's earnings from income taxes, but the IRS ultimately disallowed the massive deductions Nelson had claimed on his tax returns and then added millions of dollars in penalties and interest, his advisers say.

In a case that could go to a jury trial in a Dallas federal court later this year or in 1992, Nelson and his manager, Mark Rothbaum of Danbury, Conn., have sued London-based Price Waterhouse for fraud, seeking $45 million in triple damages under federal anti-racketeering statutes and an additional $50 million in punitive damages. Price Waterhouse, one of the so-called Big Six accounting firms, denies proposing the investments to Nelson and denies culpability for his tax deficiencies, according to documents filed in federal court.

"We do not believe, as a result of any professional services to WillieNelson, that we are responsible for any losses he might have suffered. We think we exercised due care and we acted responsibly, " said Allen Young, deputy general counsel for Price Waterhouse. "If WillieNelson incurred losses, it was because of decisions he made."

Nelson and his attorneys express confidence that the singer will win a large enough judgment from Price Waterhouse to pay the heavy tax debt. The IRS has taken the precaution of slapping a lien on any judgment or settlement that may result from the case. The agency also has liens on his future royalties from records and songwriting.

The IRS didn't seize every possession of Nelson's in raids the night of Nov. 9, but agents either removed or padlocked enough of his belongings, including cash in bank accounts, to seriously inconvenience the singer and his family. For example, his daughter Lana has been told by the IRS to leave the Hays County ranch house owned by her father, and the IRS seized the Evergreen, Colo., ranch that had been awarded temporarily in 1989 to Nelson's estranged wife, Connie, by a Travis County district court. She now lives in San Diego with the couple's teen-age daughter; their divorce is still pending.

Also taken were more than a dozen other properties including the boyhood home Nelson was restoring in Abbott, and the centerpiece of his life in Austin, the complex in the Village of Briarcliff that included a nine-hole golf course, a recording studio, his hilltop home and movie sets. Nelson is most upset by the loss of the recording studio. "You can play golf in a lot of places, but the studio was really my little temple (where) I liked to go and make music, a little church, " he said.

The IRS allowed Nelson to keep his secluded beach house on Maui, two leased tour buses, and the use of some condominiums near the recording studio. His Maui property was left "because there's not enough equity in it for them to fool with, " said Nelson, who finds a positive side to the IRS seizures.

"I had a lot of things I owned I needed to get rid of, " he said. "I had a lot of people around and needed to back off and stop supporting half the world so I could stop and look at my situation. It's given me time to take inventory.

"I'm not completely broke — I did a show in Hawaii and promoted it myself, " he said. "We didn't make a lot of money, but I've got spending money 'til I can get out on the road again."

Although Nelson is reluctant to accept charity, McDavid and other wealthy friends may buy back Nelson's studio and other properties when they are auctioned by the IRS in a couple of weeks. McDavid suggests but won't confirm that it has been discussed.

Nelson said he has no doubt he'll get it back. "I really can't imagine it being that big of a problem because I've already had a lot of people say, 'Let me know when I can help.' Hopefully, we could get it worked out before it could go up for auction — that the IRS could see the (moneymaking) potential of the studio."

His immediate goal, discussed at a meeting with IRS officials last week, is the return of dozens of master audio tapes seized by the agency and the use of his studio. To pay the tax debt, Nelson hopes to release one or more albums, called the IRS Tapes, of unreleased material from the seized tapes, which he contends were taken wrongfully because they belong to his record company, CBS.

Nelson, who readily admits he is not sophisticated about business matters, has a legal and management team that has been together for more than a decade. It includes Rothbaum and entertainment lawyers Joel Katz of Atlanta and Charles Meadows of Dallas. Laurence Goldfein, a New York attorney and accountant, was hired last year to deal with the IRS problems, and Goldberg is lead attorney for the Price Waterhouse suit, filed last August.

The mantle of expensive advice didn't prevent the singer's tax problems, however, prompting some of Nelson's associates to privately question the competence of his legal help. But Nelson is reluctant to criticize anyone but Price Waterhouse: "I think it's a little late to start blaming people."

Nelson said he was not surprised when the IRS swept down on his properties late last year. "Everybody was more shocked about it than I was because they hadn't been living with it for several years. (The IRS) is not prone to give a lot of advance information when they are going to make a move, so I was expecting it at any time. Over the years the penalties and interest on that particular debt were so large there was no way I could come up with that kind of money."

Nelson's tax troubles began after he moved to Austin from Nashville in 1971 and his career took off. From the '72 to '78 tax years, the singer and the IRS were frequently at odds about the profits and losses on his various enterprises, which included his record sales, Fourth of July picnics, concerts, T-shirt sales and endorsements. Moreover, Nelson claims his manager from '75 to '78, Neil Reshen, also of Danbury, made a shambles of his finances and failed to file tax returns. In 1980, the singer sued Reshen for $12.7 million for mismanagement and later settled out of court for an undisclosed amount.

The IRS assessed Nelson $2.3 million in back taxes and penalties for the years '72-'78. In the meantime, court records show, he hired Price Waterhouse to reconstruct the books that Reshen allegedly left incomplete. Nelson's relationship with the accounting firm later broadened and the firm gave him investment advice and prepared his tax forms, according to court records. His lawsuit with Price Waterhouse states that Nelson paid the firm more than $1 million in fees from 1979 to about 1985.

In 1980, Nelson and Rothbaum met in Austin with a Price Waterhouse partner to discuss investing in forward contracts in federal mortgage securities with First Western Government Securities, the lawsuit states. Nelson made an initial investment of $300,000 in December 1980 and 13 months later invested an additional $165,000, according to pleadings. The cattle investments came in 1983, again on the advice of Price Waterhouse, which had proposed both the First Western and cattle investments as legitimate tax shelters, records indicate.

The IRS disallowed deductions taken on Nelson's 1980-'82 tax returns for the First Western Securities investments and the cattle-feeding operations. In addition, Nelson lost $1.6 million cash on the cattle-feeding operations, Goldberg said.

In his suit against Price Waterhouse, Nelson claims that those investments cost him $15 million in lost capital and tax penalties and interest. He also charges that the firm failed to adequately research the investments and then committed fraud by attempting to cover up the failure to investigate them.

Nelson, through his attorney Goldberg, also contends that Price Waterhouse violated the Racketeer Influenced Corrupt Organizations Act and should pay Nelson treble damages. The suit seeks an additional $50 million in punitive damages.

Nelson was not the only one burned by investments in First Western, according to U.S. Tax Court case reports. The summaries, for a suit filed against the IRS by four taxpayers in 1987 and upheld last year on appeal, say the Tax Court found that the First Western forward contracts were "illusory, fictitious and not bona fide transactions." The court also found that any reasonable, prudent person should have questioned them.

Goldberg said that "the whole tax shelter was an out-and-out fraud. It could have been spotted by just an ordinary professional let alone an experienced lawyer."

"To be perfectly honest, " Nelson said, "I was advised to do it by (Rothbaum), but he thought it was such a good idea that he invested some of his own money, which he lost."

Rothbaum did not return calls to his Danbury office, and his secretary referred questions to Goldberg.

Young, the Price Waterhouse counsel, said Nelson "cannot blame us for our lack of due care or lack of professionalism for our services rendered. People do lose money, but that doesn't mean they can hold their accountants responsible if the accountants acted properly any more than a doctor can guarantee that you're going to be cured . . . an accountant isn't a guarantor of the accounting and tax services. We provided proper professional services for Willie."

In addition to the disallowance of the supposed tax shelters, the IRS also disallowed substantial deductions Nelson had taken for his other enterprises, Meadows said.

Last week, Nelson said he never had any intention of dodging taxes, but when he realized massive back taxes would be due for the tax years of '80-'82, he was still trying to pay off the disputed taxes from the '70s and pay his current taxes on a timely basis.

Nelson's immediate goals are to persuade the IRS to release his musical tapes so he can proceed with putting out new albums. He also said he is eager to get back on the road and play concerts.

The IRS won't comment on Nelson's proposals. But last Monday, Nelson had his first face-to-face meeting with Austin IRS officials and left the meeting buoyed: "It was very positive. We've agreed to figure out a way to work it out . . . I can see a light at the end of the tunnel."

Down the years with Willie

1971 -WillieNelson moves to Austin from Nashville, becomes pioneer in the "outlaw" country movement

1973 - 50,000 people attend first Fourth of July Picnic at Dripping Springs

1975 -Nelson hits pop singles charts for the first time with Blue Eyes Crying in the Rain; album Red Headed Stranger reaches No. 28 on pop album charts. Nelson, with a $580,000 personal income, hires Neil Reshen of Danbury, Conn., as manager

1978 -Nelson's income rises above $2 million; he fires Reshen

1979 - Only year from 1972-82 in which Nelson's tax return not challenged by IRS. Nelson hires manager Mark Rothbaum of Danbury and Dallas attorney Charles Meadows. Nelson hires Price Waterhouse, buys foreclosed Pedernales Country Club

1980 -Nelson files $12.7 million suit against Reshen for mismanagement, settles out of court. Buys securities from First Western through Price Waterhouse as a tax shelter. 96,000 people attend Fourth of July picnic at Nelson's country club

1982 - Always On My Mind becomes a huge hit

1983 -Nelson makes large investment in cattle-feeding operation

1984 -Nelson loses $1.5 million on cattle investment, overpays 1983 taxes by $18,700, makes large contribution to Salvation Army for Austin street people. IRS files tax suit for Nelson's back taxes from 1972-78

1985 -Nelson fires Price Waterhouse, plays 97 major concerts with $14.5 million in ticket sales. Signs on to endorse Wrangler jeans

1986 - Establishes Farm Aid with concert at University of Illinois stadium. Stardust album completes eighth year on country music charts. Builds movie ranch, stars in Red Headed Stranger

1987 - Nelson loses $600,000 on Carl's Corner Fourth of July picnic, says that is last picnic

1989 - Separated from wife, Connie

1990 - Revives Fourth of July picnic at Zilker Park. IRS and Nelson settle 1984 tax suit in June, agreeing Nelson owes $6.5 million taxes, $10 million in penalties and interest. Nelson sues Price Waterhouse in August for fraud and mismanagement. IRS seizes country club, 21 other properties in four states in November