Taxing Situation

Taxing Situation

Two members of a prominent family demand a big IRS refund while the FBI shows interest in their former road contracting company, once one of the biggest in Florida.

By Francis X. Gilpin

Associate Editor

A family of Tampa highway builders is locked in courtroom combat with the Internal Revenue Service. But the Cones could face a bigger legal scrape down the road.

Retired patriarch J.L. Cone and one of his sons, Christopher D. Cone, blame their IRS woes on their attempts to help out another son, Michael L. Cone, who was jailed in a 1999 bribery scandal.

J.L. Cone, 83, of Tampa, and Chris Cone, 50, of Brandon, have sued the IRS in federal court to force the return of $339,210 that they either paid or had withheld from their personal income tax refunds between 1999 and 2003.

The father and son say they've already done enough to make up for Mike Cone's failure to remit payroll taxes to the IRS around the time of his incarceration. The taxes were - or were supposed to have been - withheld from the paychecks of employees at Cone Constructors Inc., the family's now-bankrupt highway construction company.

In 1999, after learning of an IRS deficiency in the range of $400,000 to $600,000, J.L. and Chris Cone say they sold a piece of company property in north Hillsborough County. They sent the entire net proceeds of $540,000 to the IRS and thought that was the end of it.

Today, however, they claim Mike Cone misled them and acknowledge the deficiency was much more than $600,000. Federal tax liens in the total amount of $2.4 million have been filed against Cone Constructors. Hillsborough records show the liens remain in effect.

The IRS went after J.L. and Chris Cone to collect the company's overdue tax liability. The two Cones say Uncle Sam has the wrong guys. The feds should be dunning the family executive who was always responsible for the books at Cone Constructors - Mike Cone.

The tax dispute underscores the pitfalls of going into business with family and having to trust colleagues who also happen to be relatives. But the bankruptcy case of Cone Constructors, which enters its fifth year in July, shows this family's situation is a good deal more complicated than the lawsuit against the IRS lets on.

The sons used Cone Constructors, which received tens of millions of dollars in state highway contracts between 1983 and 1999, as something of a personal piggybank to finance other ventures, according to court records. Mike Cone hasn't been forthcoming with corporate records that might assist Chapter 7 trustee Carolyn R. Chaney in tracking down those family withdrawals and other assets of the company, court documents show.

Meanwhile, a federal grand jury has subpoenaed some of the records that have come into Chaney's possession. That cannot be good news for any business, family-owned or otherwise.

A long history

Cones have been building roads in and around Tampa almost since Teddy Roosevelt brought the Rough Riders to town at the end of the 19th Century. J.L. Cone's Plant City-bred father, Julian L. Cone, was the first of the clan to get into the trade. A teenaged J.L. Cone joined his father at work during the Great Depression.

J.L. and his younger sibling, Douglas P. "Diesel" Cone, later went into road construction together. Diesel is the most famous Cone since a newspaper expose last year.

The St. Petersburg Times reported that Diesel Cone, before the death of his first wife in 2003, had headed two households: One with his late spouse and another with a former mistress whom he married shortly after his first wife died. For years, the two families lived 20 miles apart in Hillsborough, the newspaper reported. Tabloid reporters went into a tizzy when the story hit the national wires.

Mike Cone, 47, of Tampa, formed Cone Constructors after briefly working with his uncle. But Mike Cone was never majority owner of Cone Constructors. He and Chris Cone each owned between 49% and 49.5% of the company at various times. Their father held the remaining 1% to 2% in case he had to "break any ties," as Carlton Fields PA attorneys Edward J. Page and Thomas P. Barber put it.

J.L. Cone retired from road building in 1973 and claims in the IRS lawsuit that he took no active role in Cone Constructors. The retiree did view the company as "the natural extension of his family's lifetime work in road building," his lawyers say.

The lawsuit asserts that Mike Cone was the "principal force" behind Cone Constructors, which grew into one of the biggest highway contractors in Florida. Mike Cone made all daily management decisions and the lawsuit contends that included decisions regarding payroll taxes.

Chris Cone left Cone Constructors in 1996 to concentrate on his aviation business in Lakeland. But he returned three years later, at his father's urging, following Mike Cone's plea to felony charges of money laundering and bribery.

Mike Cone was accused of plying a state highway inspector with cash and gifts, including a waterfront home in Apollo Beach. In exchange, according to state prosecutors, the inspector ignored complaints from Cone subcontractors who weren't getting paid on road projects.

As part of his plea deal, Mike Cone was released from county jail during the day while serving a five-month sentence. That was so he could finish a few state road jobs before he and Cone Constructors were banned from taking on new ones for five years. J.L. Cone brought in Chris Cone when his jailed son fell behind schedule wrapping up the remaining road projects.

Leaving the financial details to Mike as usual, the father and his other son say they only learned of a payroll tax deficiency in the summer of 1999. Mike Cone assured them it would be covered. Chris Cone advanced $100,000 to Cone Constructors and J.L. Cone loaned another $2.5 million for working capital and other needs.

The father and son say they didn't realize Mike Cone was fooling them until November 1999 when they also discovered Chris Cone's signature had been forged on company checks. Both J.L. and Chris Cone quit Cone Constructors in January 2000.

J.L. Cone told GCBR that he wasn't interested in discussing the matter. Chris and Mike Cone didn't respond to telephone messages.

Who's responsible?

Their resignations came too late to spare them from the reach of the IRS.

Federal tax collectors have been unmoved by the defense of J.L. and Chris Cone: Their own flesh and blood took advantage of their compassion.

"Michael had been responsible for the corporation's finances for 15 years and J.L. and Chris believed that, in spite of his arrest and conviction, his skills at operating the business had not diminished," Carlton Fields lawyer David P. Burke wrote to IRS revenue officer Ray Yongue.

In one audit, 1998 operating income for Cone Constructors was reported to be $6.2 million. Chris Cone paid more than $100,000 in 1998 income tax from his slice of the subchapter-S corporation's profits.

The IRS contends the father and son shouldn't have been oblivious to their family member's potential for serious mischief.

"Based on Michael L. Cone having been arrested in July of 1999 for bribing a Department of Transportation official," Yongue states in court records, "it is difficult to believe that they subsequently took any verbal assurances from Mike without investigating the issue/s themselves."

Yongue further pointed out that the Cones were aware that suppliers and subcontractors were going unpaid while Cone Constructors was so hobbled that Chris had to come help his father rescue it.

Burke and Carlton Fields lawyer Cristin A. Conley rejoined: "Michael's conviction for bribing a state official (who was a long time friend of Michael's) was not compelling evidence that he would lie to his father and brother about the financial status of the corporation in the face of 15 years of competent management."

The Cones told Yongue that Cone Constructors was under contract to be sold during the fourth quarter of 1999. Not surprisingly, perhaps, the deal fell through.

"J.L. and Chris are simply well-meaning relatives who jumped to the aid of their son and brother, respectively, who needed them at a tough time," the Cone lawyers argued before IRS appeals officer Joseph L. McDermott. "The facts all indicate that the failure to pay over the taxes at issue here was clearly Michael's and Michael's alone."

Notwithstanding that, the Cones offered to resolve a $315,283 tax liability for $150,000. The IRS rejected the compromise and the Cones took the agency to court.

The picture is bleaker for the Cones over in bankruptcy court.

Trustee Carolyn Chaney hired forensic accountant John R. Magliano Jr. in early 2001 to help her and her counsel, Allan C. Watkins. Magliano explained why in court filings. "This case has both novel and difficult questions," wrote Magliano. "The debtor has been uncooperative and has made the collection of records and the investigation of data much more difficult than it had to be.

"Records are missing and what bank records there are, are very sparse. Computers have been removed and their location as well as the location of missing documents is unknown. The network server has had all the stations removed and their location is unknown.

"One of the major questions is what amount is owed to the corporation (debtor) by the officers of the corporation (debtor). Since this is most likely in the millions it is the focus of the investigation."

As far back as 1992, there were concerns about the disbursement of company funds. Ronald D. Rooks, a certified public accountant in Tampa and an external auditor for Cone Constructors, wrote a memorandum to his file that year.

"The receivables from related entities and from Michael and Chris Cone individually, has continued to grow each year," Rooks wrote in the memo, which has since been filed in bankruptcy court. "The basic problem is that Michael Cone and to some extent Chris Cone are using Cone Constructors, Inc. in effect as a bank to finance other ventures."

At the time, Mike Cone was developing real estate and held an interest in a Sebring International Raceway lease. Although J.L. Cone owned just a tiny fraction of Cone Constructors stock, Rooks says Mike Cone told him that his father "still effectively has much control and input." Mike Cone further related to Rooks that his father wasn't happy with his sons because they took cash out of the company for their own business interests.

Indeed, two years ago, Chaney sued Chris Cone and his wife, Madeleine G. Cone, to recover nearly $5 million that she claimed the couple had borrowed or otherwise removed from the coffers of Cone Constructors. Chris Cone argued he had paid off the debt when he sold his stake in the company, six months before the bankruptcy filing. Chaney settled for $225,000, citing the company's poorly maintained financial records.

Chaney referred most questions about the Cone Constructors case to her attorney, Allan Watkins. "It's a very complicated case," Watkins told GCBR.

Another lawsuit filed by Chaney, this one against Mike Cone and his wife, Joanne, is the last major piece of the bankruptcy case to be concluded, says Watkins.

Along with Mike and Joanne Cone, Chaney named as another defendant an entity called Stone Creek Lodge Inc., whose president is Mike Cone. Together, the couple and the company owe $8.5 million to Cone Constructors, says Chaney.

There's no sign of a settlement in that proceeding. But there are indications that Chaney isn't the only one interested in Cone Constructors.

The FBI turns up

In the summer of 2001, forensic CPA Magliano reported to the court that he began meeting with personnel from the Federal Bureau of Investigation's Tampa office.

FBI agent Candace Calderon requested in October of that year that Magliano provide more than 6,000 computer files from Cone Constructors, including records of "checks paid and personnel information on Chris Cone and Charles King." Magliano identified King as a pilot for Cone Constructors.

In November 2001, Magliano reported, he turned over the data to the FBI and briefed agents on how he had recovered it from Cone Constructors computers. Magliano declined comment on the Cone Constructors case.

In the fall of 2002, trustee's attorney Allan Watkins reported conferring with Chaney, trustee's office trial attorney Theresa Mitchell Boatner and Assistant U.S. Attorney Adelaide Few. All three conversations concerned a grand jury subpoena.

"The trustee in bankruptcy is required to cooperate with any investigation and the trustee is cooperating," says Watkins. Chaney has provided deposition transcripts, asset schedules and other records to federal agents pursuant to grand jury subpoenas, says Watkins, who referred further questions to the U.S. Attorney's Office, Tampa.

Assistant U.S. Attorney Few told GCBR that she had no comment on Cone Constructors. An FBI spokeswoman says the bureau won't confirm or deny the investigation.

Chaney says she hopes to close the bankruptcy case of Cone Constructors, which has about $1.7 million in assets at last accounting, by the end of this year. Watkins predicted that the IRS will get all of the cash after final liquidation.