Feds seek to derail H&R Block's deal for TaxACT

BOSTON -- The Department of Justice is trying to halt H&R Block's plans to acquire the creator of TaxACT software, saying the deal would leave just two major competitors in the do-it-yourself tax preparation market.

The agency on Monday filed an antitrust lawsuit arguing that the transaction would eliminate a strong rival of H&R Block Inc. and Intuit Inc., maker of such programs as Quicken and TurboTax.

Regulators say those two companies and TaxACT account for 90 percent of tax preparation software sales, with H&R Block and TaxACT second and third behind Intuit.

"TaxACT is an aggressive competitor in the market, and is feared" by the other two companies, Christine Varney, an assistant attorney general, told reporters on a conference call.

H&R Block Inc. announced plans in October to pay $287.5 million in cash to acquire 2SS Holdings Inc., the parent of 2nd Story Software, the privately held company that created TaxACT. H&R Block said it would combine its H&R Block At Home digital business and the TaxACT business into a single unit led by TaxACT management, but will continue to sell both brands.

The Justice Department says the deal would create an opportunity for H&R Block to coordinate with Intuit, based in Mountain View, Calif., on prices, quality and other business decisions.

Messages seeking comment from H&R Block, which is based in Kansas City, Mo., were not returned. A spokeswoman for 2nd Story Software, based in Cedar Rapids, Iowa, declined to comment.

As many as 40 million taxpayers use digital software products to file taxes, either through the provider's website, or loaded onto a taxpayer's computer.

The Justice Department's complaint includes statements from H&R Block presentations and emails that the agency says show that the company believed the elimination of a competitor would be a primary benefit of the deal.

Varney called TaxACT an industry "maverick" that has disrupted the market. For example, TaxACT was the first company to offer all taxpayers the ability to prepare and electronically file their federal individual tax returns for free directly from its website.

"Due to that competition, H&R Block felt significant pressure to offer a free product to consumers," Varney said.

TaxACT was launched in 1998. The company says its online business has assisted with more than 19 million electronically filed federal returns since 2000, including more than 5 million filers in the 2010 filing season.

H&R Block is the nation's largest tax preparer, but has faced growing competition in digital tax preparation. For example, in 2010, its customers filed about 5.9 million digital returns, including about 2.2 million using its off-the-shelf software and about 2.9 million online. That was up a marginal 0.4 percent from 2009, while Intuit reported 10 percent growth for TurboTax.

H&R Block has reported stronger growth this year. Filings using its software and completed online were up nearly 15 percent through April 18, compared with the total at that date in 2010. H&R Block also said on April 26 that it was gaining market share in its retail and digital businesses.

The company also announced that day that board member and former eBay executive William C. Cobb will become its new president and CEO, replacing Alan Bennett, who is retiring in September.

When H&R Block announced the acquisition, it said it expected the TaxACT business would add 5 cents to its earnings per share in the fiscal year ended April 30, 2011. The projection was based on the deal receiving required regulatory approval and closing at the end of last year.

When the deal was announced, Bennett said the transaction would provide H&R Block "with innovative growth-oriented leadership to accelerate our digital tax offerings and results."

Shares of H&R Block fell 26 cents, or 1.6 percent, to $16.07 in midday trading.

Shares of Intuit fell more sharply, losing $1.88, or 3.4 percent, to $53.10.