Dine Originals, an umbrella organization that aims to strengthen independent restaurants’ abilities to compete against better-financed chains, is reorganizing in the wake of a costly tax battle with federal authorities that contributed to the defection of a third of its chapters nationwide.
The group, formerly called the Council of Independent Restaurants of America, or CIRA, has seen a shift to local-chapter autonomy since it complied with an Internal Revenue Service audit that saddled disgruntled members with back taxes and penalties, causing many to leave the confederation.
The number of Dine Originals chapters has shrunk from 18 in mid-2006 to 12 now, with an estimated total membership of about 400 restaurants. At least two of the splinter chapters have disbanded, citing reasons other than the tax setback, though the rest have maintained independent memberships with financial autonomy. However, some defector chapters say they hope to rejoin the national organization after a restructuring.
“We are regrouping now,” said Mark Haugen, chairman of DO’s board of directors and chef-partner at Tejas in Edina, Minn. “We’ve had some dissatisfied chapters, but there are still a lot of committed people. We are growing it chapter by chapter.”
Problems with the IRS surfaced about a year ago when the agency claimed that Dine Originals did not qualify for not-for-profit status, contrary to members’ assumptions, Haugen said. The IRS determined that the restaurant group was more focused on marketing and promotions aimed at increasing members’ profits than on educational programs, he said.
CIRA was formed in 1999 by a group of restaurateurs, most from medium-size cities, concerned about erosion of their market share as branches of well-financed dinnerhouse chains opened nearby. The group also promoted the formation of purchasing co-ops to help independent operators wield more chainlike buying clout, and some chapters reported substantial savings from such alliances.
Don Luria, owner of Cafe Terra  Cotta in Tucson, Ariz., was president during most of the organization’s existence, following the initial presidency of Robert Kinkead of Kinkead’s  in Washington, D.C.
Luria, who resigned last July to concentrate on running his restaurant, could not be reached for comment. The Louisville, Ky.-based FSA Group, which manages associations and was acquired in August 2003 by Lebhar-Friedman Inc., parent of Nation’s Restaurant News, managed CIRA/Dine Originals until 2005.
Haugen said Luria’s resignation was not tied to the IRS problem.
“He did a lot to get the organization to where it is today,” Haugen said. “He was good at growing chapters and getting things set up.”
Existing chapters still affiliated with the national Dine Originals are Birmingham, Ala.; Chicago; Columbus, Ohio; Houston; Louisville, Ky.; Naples, Fla.; Nashville, Tenn.; San Diego; Sarasota-Manatee, Fla.; Tucson; Minneapolis-St. Paul; and Mt. Washington Valley, N.H.
Chapters that have either dropped their affiliations with the national organization or disbanded in the last year include Albuquerque, N.M.; Cleveland; Indianapolis; Kansas City, Mo.; Milwaukee; Madison, Wis.; St. Louis; and Washington, D.C.
The 43-member Madison chapter withdrew to reorganize as its own not-for-profit organization and to have local control over finances, said Barbara Wright, chapter president and owner of Dardanelles Mediterranean restaurant there.
“It was a hard decision to make, but we felt it was what we needed to do,” she said.
She does not anticipate that the split will be permanent, however.
“This organization is wonderful, and I enjoy being part of it,” she said. “We are in contact with other chapters, and we learn from each other.
“I really believe in the independent-restaurant movement,” she said, noting with regret that three of her chapter’s member restaurants closed over the summer.
St. Louis, which withdrew from national membership, still has 40 members in its local chapter.
Hoping to rejoin a reconfigured national organization in a year or two, Hamilton said some chapters found it burdensome to have to pay unexpected back taxes. However, “for our chapter, it wasn’t that big a deal,” he said.
Jack Schwindler, president of the Kansas City chapter, said his 48-member group withdrew from the national organization last July.
“It’s touchy ground,” he said, declining to explain further.
Advantages Schwindler cited for having a local chapter are that it gives members “a little bit of power in numbers.” Sharing ideas, advertising and group purchasing have worked well, he said.
Chapters that were members during the past three years had to come up with funds for back taxes and penalties, for which most had not put money aside. However, the unspecified total bill turned out to be lower than originally estimated, Haugen said, and the matter is getting close to being resolved.
“The outcome is not as bad as people expected,” said Scott Heimlich, Dine Originals’ treasurer and board member and past president of the Columbus chapter. “The problem was just from miscommunication. Mistakes were made. We could point fingers, but we are just moving forward.”
“Working with the IRS was challenging for a small organization,” said Michael Klauber, president of the Sarasota-Manatee, Fla., chapter and owner of Michael’s on East in Sarasota. “We will be fine. It took a lot of effort. We are on the right track.”
Klauber’s chapter, which now has 55 members, is one of the largest of the dozen remaining chapters and is still growing. He noted that Naples has a new chapter and that several other Florida cities are considering forming chapters of their own.
The Columbus chapter members decided to maintain a national affiliation, despite what chapter president Diane Warren of Katzinger’s Delicatessen termed “weaknesses” in the organization.
“We’ve gotten some wonderful publicity,” she said. “Columbus is inundated with chains. It’s important that independent restaurants not go the way of the independent bookstore and hardware store.”
Her chapter’s membership increased from 17 to 30 members, in the past year and continues to grow.
“We tailored our organization to what individual restaurants wanted,” she said.
The 32 members of the Nashville chapter, led by Rick Bolsom of Tin Angel restaurant, has launched an especially active marketing program that includes cable TV, public-radio and print campaigns, and participation in arts and charitable events.
“We’ve developed a lot of visibility for our members and for independent restaurants in general,” Bolsom said. “It’s not just about the 32 of us.”
Haugen said it has been more effective to concentrate more on marketing and less on forming purchasing cooperatives. He also noted that the board has been discussing the wisdom of having each chapter become a separate entity in charge of its own finances rather than continuing to be part of a single taxable body.
That subject and others are on the agenda of a national Dine Originals meeting tentatively scheduled for this fall in Birmingham.