H&R Block Eyes Growth Potential

GUESS who said this:

"The US tax system is regarded as a model tax system around the world.... It works."

Pat yourself on the wallet if you picked Thomas Bloch, who in August became chief executive officer of H&R Block Inc. The world's largest tax-preparation firm was founded in 1955 by Mr. Bloch's father, Henry, and uncle, Richard. (The family name was Americanized for the company to avoid mispronunciation.)

Since then, H&R Block has flourished by guiding millions of middle-income taxpayers through the jungle of United States income tax regulations. Last April the company filed more than 1 out of 10 returns to the Internal Revenue Service, which received 108 million. More than one-fifth of all taxpayers who sought outside assistance visited their neighborhood H&R Block office.

"I agree that it [figuring taxes] is complicated," Bloch says. "But ... in order to maintain fairness in the system, it has to be complicated. While it may be very appealing to have a three-line tax return in which you enter your total income, take a percentage and that's your tax, I don't think it would be a good tax system for the country. I don't think it would be fair."

H&R Block isn't the only voice arguing that the US tax code is a good place to reward behavior like saving, giving to charity, and homebuying. But it certainly has a stake in the resulting complexity: Tax simplification in New Zealand put the company out of business there this year.

In the US, in contrast, Block's revenue has grown every year. So has its dividend, since the company went public in 1962 (the Bloch family still owns 6 percent). Earnings have risen in each of the last 20 years.

For fiscal 1992, which ended April 30, the company broke all records, earning $162 million on revenues of $1.37 billion. Block also has no long-term debt and $400 million in liquid assets.

No longer solely a tax preparer, the company diversified a decade ago into computer services and temporary-help services.

Although its CompuServe communications and software subsidiary earned a 19.7 percent return on revenues last year, the 4.5 percent return from INTERIM Services fell far short of the 26.3 percent return from the H&R Block's tax operations. The company indeed likes to buy back its high-earning tax franchises and operate them itself.

And with so much cash on hand, Block also is contemplating stock repurchases of up to 1.5 million shares during fiscal 1993. "That's not to say we wouldn't consider a fourth core business," says Bloch, who spent 16 years working his way up through the company's tax operation.

With 9,288 outlets and 18.3 million customers worldwide (up 6.6 percent from last year), H&R Block is the McDonald's of tax preparation. The company also serves Canadian and Australian taxpayers, as well as US military personnel overseas.

Like the fast-food chain, H&R Block has so saturated the US that few towns that could support a Block office remain unserved. "We have gone down ... about as far as we can in population size," Bloch says.

For many years the number of US offices was decreasing, he adds. Then along came electronic filing, which speeds refunds but must be handled by an "authorized transmitter" like H&R Block.

When the option began in 1986, 25,000 taxpayers filed electronic returns. The total grew to 11 million this year, and the IRS hopes for 25 million by 1995.

Tax preparation would be "a much more mature business without electronic filing," Bloch says. "It's become a very important part of our business."

Indeed, US demand for Block's overall tax-return business grew only 4.8 percent this year, to 13 million returns. But that total includes demand for electronic filing, which grew by 35 percent to 6.8 million returns. Among the returns Block filed electronically (via CompuServe), 4 in 10 were for individuals who had prepared their taxes themselves.

One thing that appeals to electronic filers is the ability to receive their refund in two weeks instead of six. More appealing still is a refund anticipation loan - 90 percent of Block's electronic filers request one. Under the company's Rapid Refund service, filers get a check from a participating bank within a few days. The bank is repaid by a direct deposit of the refund from the IRS. A flat $29 service fee charged by participating banks amounts to 151 percent interest on a $500 loan with a two-week p ayback period.

One competitor of Block's refuses to help its customers get refund anticipation loans, likening them to cocaine. But the loans are legal - and temptingly profitable. In June, H&R Block formed Block Financial Corporation, a subsidiary that will participate with Mellon Bank National Association of Delaware in making refund anticipation loans.

Such loans - and the electronic filing business overall - could be deterred by an IRS announcement this month that the agency will no longer confirm in advance the amount of a refund.

Eliminating that repayment assurance, a move which H&R Block protested, "may have a significant effect on our Rapid Refund business," Bloch says. "But I don't think I would characterize it as a catastrophic development." Banks may be able to develop other criteria for qualifying loan applicants, he says.

The company also denounced President Bush's unilateral reduction of withholding for all the nation's taxpayers. Block immediately offered, and continues to perform, a free W-4 filing service so taxpayers can restore withholding to its previous level.

Bloch says most taxpayers like to receive a sizeable refund each year. Yet in doing so, they have in effect made an interest-free loan to the federal government. "You or I may suggest that's not in their best interest" to over-withhold, Bloch says. But "the taxpayer should choose." He says many people use the withholding system as a forced savings plan, he says.

Some people may not realize that their withholding was reduced. "One of the reactions may well be: `You must have made a mistake on my tax return. I always get a bigger refund than that.' So I think, yeah, it could reflect badly on us," Bloch says.