Future Forum: Guilt, Innocence, and the Death Penalty 
Poor Willie
The IRS nailed him for millions, only to find that Willie Nelson had already given it all away.
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Or perhaps, as Gator Moore suggested, “He doesn’t mind being conned.” No one could say for sure what Willie felt about these matters, and no one felt comfortable trying. This was one family that didn’t second-guess its patriarch. There were no doubters on the bus.
The fame, the fortune, the utopia on the Pedernales—all had come at a price years before. That price was Neil Reshen, a bullying new York entertainment manager who had secured Willie’s contract with Atlantic and, later, the seven-figure CBS/Lone Star Records contract that gave Willie full artistic control over his product and a custom label for his friends. Reshen’s clients included Miles Davis and Frank Zappa, fiercely independent talents whose quests for artistic freedom necessitated an equally fearless agent. Waylon Jennings, who first signed with Reshen in 1972, persuaded Willie the same day to sign on as well. In a 1975 interview, Jennings likened Reshen to “a mad dog on a leash.” Willie, in the same interview, said that Reshen was “probably the most hated and most effective manager that I know.”
With Reshen browbeating promoters and threatening to audit the record company, Willie and Family went places in a hurry. “Where we suddenly were was where we’d never been,” said Poodie Locke. “The most we’d made was a $5,000 New Year’s date. The next thing you know, it’s $10,000, then $25,000. Then we were going to Europe. I figured, ‘This guy’s taking care of us.’”
Someone had to mind the store, in any event, and it couldn’t be Willie. “I can’t be sure that taxes are paid and records are kept and also write songs and play music,” he said. “At some point you have to trust somebody. And that’s always dangerous.”
With Neil Reshen, it was disastrous. Jody Fischer, who was Reshen’s associate before leaving to become part of the Nelson entourage, said her former boss was someone who, “given the choice between telling the truth and telling a lie, even if the outcome was absolutely the same, would usually choose to tell a lie.” (“I absolutely deny that,” replied Reshen, “but I could be lying.”) In a 1980 suit, Willie said he was given the impression that Reshen was both a lawyer and a CPA, neither of which was true. What Reshen didn’t tell Willie was that he had pleaded guilty to embezzling stock from a Los Angeles bank. Nor, for that matter, did Reshen say that he wasn’t paying Willie’s taxes—Reshen’s responsibility, according to Willie, though Reshen has consistently denied this.
Willie had never been on the best of terms with the taxman. He had been hit for unpaid taxes for 1967, 1968, and 1969 and had been slapped with state and federal tax liens throughout the early seventies. Not that this was surprising at a time when, according to Tim O’Connor, “we collected the box office with a pistol and carried the dollars in a briefcase.” Back then, the road was meaner and the stakes smaller.
But now the numbers were very, very big. Of particular interest tthe dollars in a briefcase.” Back then, the road was meaner and the stakes smaller.
But now the numbers were very, very big. Of particular interest to the IRS were Willie’s Fourth of July Picnics, which drew tens of thousands of dollars in gate receipts. Perhaps, as Willie claimed, “That was when a lot of money changed hands. There weren’t the profits there that the IRS thought there were.” But the money had to have gone somewhere, and Willie couldn’t prove that it hadn’t gone to him. Besides, said IRS officers, showing Willie aerial photographs: There are 70,000 people here; why are there only 20,000 receipts? “They just weren’t aware of what really happens at those things,” said Willie, “where if you get one out of hundred to pay, you’re fortunate.”
After becoming convinced that Reshen was damaging his reputation and siphoning off more than the agent’s share of the profits, Willie fired him in 1978 and promoted his assistant, Mark Rothbaum. Like Reshen, Rothbaum was a sharp resourceful New York businessman. But more important, Willie felt he could trust Rothbaum, for he had proven his loyalty the hard way. On August 22, 1977, the police had intercepted a package containing several grams of cocaine, which was on its way to a Nashville studio where Waylon Jennings was recording. Mark Rothbaum pleaded guilty to distributing cocaine, did time in 1978, then went straight to work for Willie Nelson—”a sign of the faith and loyalty Willie felt for this man,” said Tim O’Connor.
In 1979, Rothbaum and Willie met with representatives of Price-Waterhouse, the internationally famous accounting firm. By then, it had been discovered that all of Willie’s financial records for the period of 1975 through 1978 had been destroyed. The IRS wanted $2 million for those tax years, and soon they would want more. The meeting therefore focused on a central subject: How do we keep Willie out of tax trouble?
After the meeting, Price-Waterhouse partner Herb Haschke wrote in a letter to Rothbaum: “One fact of business life which Willie cannot escape is that without tax-oriented investments, he will pay substantial amounts of income to the IRS every year.” In a 1990 lawsuit, Willie would claim that Haschke urged him to defer taxable income by investing in government securities issued by First Western Government Securities, a San Francisco-based firm.
Financial planning, of course, had no place in Willie’s worldview. His belief that you should spend your way through life and die a pauper kept him forever at odds with his moneymen. “Willie’s sense of responsibility about his wealth was not what I thought it should be,” said Harvey Corn, an Austin accountant who briefly did business with Willie after Reshen was fired. “I wasn’t at the time concerned with paying his tax bills. I was concerned, though, about the intelligent management of the considerable amount of money that he was making, with particularly his young daughters in mind. The fact is that Willie just didn’t see the world that way. He wasn’t worried about providing $20 million trust funds for his kids. You just couldn’t get his attention. You’d be talking to him, and then he’d just drift off and start picking on a song. You got the message after a while.”
The Reshen-era skirmish with the IRS persuaded Willie that he would have to modify his thinking somewhat. But the Price-Waterhouse proposal seemed a little dubious to him—especially because he would have to borrow money from a bank to invest in First Western. If he was going to borrow, why not just use the money to pay his $2 million in back taxes? “I couldn’t see it at the time,” said Willie, “and I argued with the professionals around me that this is not making sense.”
Nonetheless, on December 22, 1980, Willie invested $30,00 in a margin account portfolio of First Western forward contracts. The next year, Willie’s suit alleged, Haschke recommended in a letter that Willie make an additional investment to shelter his income despite the fact that Price-Waterhouse had learned that other First Western investors had been questioned by the IRS in 1981. Willie put in another $165,000, and Rothbaum himself invested a total of $43,440.
Later, Jan Smith, one of the Price-Waterhouse representatives who handled Willie’s account, admitted, “There’s a lot about First Western that’s known that wasn’t known in 1980.” The suit alleged that in telephone conversations in August and September of 1980, Price-Waterhouse partner John Walsh assured one of Willie’s lawyers that he had personally visited First Western’s operations in San Francisco and found them legitimate. Yet by 1983, the IRS began a serious probe of First Western, especially its practice of determining margins on the basis of the tax loss requested.
Recognizing that, Haschke suggested that Willie and Rothbaum abandon First Western and consider investing in cattle and cattle feed. The plan was simple: Buy cattle and feed at the end of the tax year, deduct the cost of the feed, and then sell the fattened cattle for a profit that would cover the cost of both the livestock and the feed. And, said Haschke, the plan was risk-free, since Willie and Rothbaum could hedge against a drop in cattle prices by selling cattle futures.
It sounded too good to be true—and it was. The bottom fell out of the cattle market in 1984, and Willie and Rothbaum lost $2 million between them. They later alleged in the suit that Haschke did not advise them to sell futures—that while cattle prices plummeted, Haschke couldn’t be reached. To make matters even worse, the IRS ultimately disallowed Willie’s $3 million deduction for cattle feed on the grounds that only $64,000 of the feed was actually consumed in 1983.
Things continued to get worse for Willie. On October 15, 1984, an IRS Notice of Deficiency was issued to Willie and Connie Nelson and to the Willie Nelson Music company in the amount of $2.2 million. The notice said that Willie still owed money from the Reshen years: more than $25,000 for royalties, some $360,000 in income, and $720,000 to cover business expenses that had been disallowed. Willie’s attorneys contested the matter in tax court, to no avail.
On May 20, 1988, Willie received a second Notice of Deficiency, this time for the years 1980 through 1982. Because of the disallowed tax shelters, he now owed more than $1.5 million for each of those years, plus millions more in interest and penalties. The mess had started during the Neil Reshen years, but the advice of Price-Waterhouse had led Willie Hugh Nelson to the edge of financial ruin. He sought the counsel of Jay Goldberg, a New York attorney whose clients included Donald Trump and the late Armand Hammer. Goldberg saw his chance to help Willie in 1990, when the U.S. Tax Court held that First Western Government Securities had engaged in fraud by creating tax deductions without regard to the possibilities of profit—a scheme, the court held, that “no reasonable person would have expected . . . to work.” On August 15, 1990, Willie’s lawyers filed a RICO lawsuit against Price-Waterhouse.
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