UNITED STATES OF AMERICA v. H&R BLOCK, INC. et al

Filing 40

MEMORANDUM re 35 MOTION for Preliminary Injunction filed by UNITED STATES OF AMERICA by UNITED STATES OF AMERICA. (Attachments: # 1 Exhibit Exhibit 1, # 2 Exhibit Exhibit 2, # 3 Exhibit Exhibit 12, # 4 Exhibit Exhibit 13, # 5 Exhibit Exhibit 30, # 6 Exhibit Exhibit 37, # 7 Exhibit Exhibit 40, # 8 Exhibit Exhibit 42, # 9 Exhibit Exhibit 43, # 10 Exhibit Exhibit 56, # 11 Exhibit Exhibit 112, # 12 Exhibit Exhibit 114, # 13 Exhibit Exhibit 115, # 14 Exhibit Exhibit 116, # 15 Exhibit Exhibit 123, # 16 Exhibit Exhibit 124, # 17 Exhibit Exhibit 139, # 18 Exhibit Exhibit 157)(Buterman, Lawrence)

Exhibit
12

H&R BLOCK INC

(HRB)

10-K
Annual report pursuant to section 13 and 15(d)
Filed on 06/23/2011
Filed Period 04/30/2011

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
;

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 2011

†

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from

to
Commission file number 1-6089

H&R Block, Inc.
(Exact name of registrant as specified in its charter)

MISSOURI

44 0607856

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

One H&R Block Way, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)

[phone]
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class

Name of each exchange on which registered

Common Stock, without par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant is a well known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ; No †
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes † No ;
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ; No †
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10 K or any amendment to this Form 10 K. †
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S T (§ 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes ; No †
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b 2 of the Exchange Act.
(Check one):
Large accelerated filer ;

Accelerated filer †
Non accelerated filer †
Smaller reporting company †
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act). Yes † No ;
The aggregate market value of the registrant's Common Stock (all voting stock) held by non affiliates of the registrant, computed by reference to
the price at which the stock was sold on October 31, 2010, was $3,564,690,812.
Number of shares of the registrant's Common Stock, without par value, outstanding on May 31, 2011: 305,383,646.
Documents incorporated by reference
The definitive proxy statement for the registrant's Annual Meeting of Shareholders, to be held September 14, 2011, is incorporated by reference
in Part III to the extent described therein.

2011 FORM 10-K AND ANNUAL REPORT
TABLE OF CONTENTS

Introduction and Forward-Looking Statements

1

PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings

1
7
12
12
12

PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information

16
17
18
32
34
79
79
79

Item 10.
Item 11.
Item 12.
Item 13.
Item 14.

PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services

81
82
82
82
82

PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
Exhibit Index
EX 3.1
EX 3.2
EX 10.6
EX 10.33
EX 10.34
Ex 12
EX 21
EX 23
EX 31.1
EX 31.2
EX 32.1
EX 32.2
EX 101 INSTANCE DOCUMENT
EX 101 SCHEMA DOCUMENT
EX 101 CALCULATION LINKBASE DOCUMENT
EX 101 LABELS LINKBASE DOCUMENT
EX 101 PRESENTATION LINKBASE DOCUMENT
EX 101 DEFINITION LINKBASE DOCUMENT

82
83
84

Table of Contents

INTRODUCTION AND FORWARD-LOOKING STATEMENTS
Specified portions of our proxy statement are listed as "incorporated by reference" in response to certain items. Our proxy statement will
be made available to shareholders in August 2011, and will also be available on our website at www.hrblock.com.
This report and other documents filed with the Securities and Exchange Commission (SEC) may contain forward looking statements. In
addition, our senior management may make forward looking statements orally to analysts, investors, the media and others. Forward
looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such
as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "will," "would," "should," "could" or "may." Forward
looking statements provide management's current expectations or predictions of future conditions, events or results. They may include
projections of revenues, income, earnings per share, capital expenditures, dividends, liquidity, capital structure or other financial items,
descriptions of management's plans or objectives for future operations, products or services, or descriptions of assumptions underlying
any of the above. They are not guarantees of future performance. By their nature, forward looking statements are subject to risks and
uncertainties. These statements speak only as of the date they are made and management does not undertake to update them to reflect
changes or events occurring after that date except as required by federal securities laws.

PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
H&R Block, Inc. has subsidiaries that provide tax, banking and business and consulting services. Our Tax Services segment provides
income tax return preparation, electronic filing and other services and products related to income tax return preparation to the general
public primarily in the United States, and also in Canada and Australia. This segment also offers the H&R Block Prepaid Emerald
MasterCard® and Emerald Advance lines of credit through H&R Block Bank (HRB Bank), along with other retail banking services. Our
Business Services segment consists of RSM McGladrey, Inc. (RSM), a national tax and consulting firm primarily serving mid sized
businesses. Corporate operations include interest income from U.S. passive investments, interest expense on borrowings, net interest
margin and gains or losses relating to mortgage loans held for investment, real estate owned, residual interests in securitizations and other
corporate expenses, principally related to finance, legal and other support departments.
H&R Block, Inc. was organized as a corporation in 1955 under the laws of the State of Missouri. "H&R Block," "the Company," "we,"
"our" and "us" are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the
context. A complete list of our subsidiaries can be found in Exhibit 21.
NEW DEVELOPMENTS – Historically, refund anticipation loans (RALs) were offered in our US retail tax offices through a
contractual relationship with HSBC Holdings plc (HSBC). We purchased a 49.9% participation interest in all RALs obtained through our
retail offices. In December 2010, HSBC terminated its contract with us based on restrictions placed on them by their regulator and RALs
were not offered in our tax offices this tax season. In connection with the contract termination, we obtained the remaining rights to collect
on the outstanding balances of RALs originated in years 2006 and later. The impact of this is discussed in the Tax Services segment
results in Item 7.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See discussion below and in Item 8, note 21 to our consolidated financial statements.
DESCRIPTION OF BUSINESS
TAX SERVICES
GENERAL – Our Tax Services segment is primarily engaged in providing tax return preparation and related services and products in the
U.S. and its territories, Canada, and Australia. Major revenue sources include fees earned for tax preparation services performed at
company owned retail tax offices, royalties from franchise retail tax offices, fees for tax related services, sales of tax preparation
software, online tax preparation fees, refund anticipation checks (RACs), fees from activities related to H&R Block Prepaid Emerald
MasterCard®, and interest and fees from Emerald Advance lines of credit (EAs). HRB Bank also offers traditional banking services
including checking and savings accounts, individual retirement accounts and certificates of deposit. Segment revenues constituted 77.2%
of our consolidated revenues from continuing operations for fiscal year 2011, 76.8% for 2010 and 76.7% for 2009.
H&R BLOCK 2011 Form 10K 1

Table of Contents

Retail income tax return preparation and related services are provided by tax professionals via a system of retail offices operated directly
by us or by franchisees. We also offer our services through seasonal offices located inside major retailers.
TAX RETURNS PREPARED – We, together with our franchisees, prepared 24.5 million tax returns worldwide during fiscal year
2011, compared to 23.2 million in 2010 and 23.9 million in 2009. We prepared 21.4 million tax returns in the U.S. during fiscal year
2011, up from 20.1 million in 2010 and 21.0 million in 2009. Our U.S. tax returns prepared, including those prepared by our franchisees
and those prepared and filed at no charge, for the 2011 tax season constituted 16.4% of an Internal Revenue Service (IRS) estimate of
total individual income tax returns filed during the fiscal year 2011 tax season. This compares to 15.6% in the 2010 tax season and 15.8%
in the 2009 tax season. See Item 7 for further discussion of changes in the number of tax returns prepared.
FRANCHISES – We offer franchises as a way to expand our presence in certain markets. Our franchise arrangements provide us with
certain rights designed to protect our brand. Most of our franchisees receive use of our software, access to product offerings and
expertise, signs, specialized forms, advertising, initial training and supervisory services, and pay us a percentage, typically approximately
30%, of gross tax return preparation and related service revenues as a franchise royalty in the U.S.
During fiscal years 2011, 2010 and 2009 we sold certain offices to existing franchisees for sales proceeds totaling $65.6 million,
$65.7 million and $16.9 million, respectively. The net gain on these transactions totaled $45.1 million, $49.0 million and $14.9 million in
fiscal years 2011, 2010 and 2009, respectively. The extent to which we sell company owned offices will depend upon ongoing analysis
regarding the optimal mix of offices for our network, including geographic location, as well as our ability to identify qualified
franchisees.
From time to time, we have also acquired the territories of existing franchisees and other tax return preparation businesses, and may
continue to do so if future conditions warrant and satisfactory terms can be negotiated. During fiscal year 2009, we acquired the assets
and franchise rights of our last major independent franchise operator for an aggregate purchase price of $279.2 million.
OFFICES – A summary of our company owned and franchise offices is as follows:
April 30,
U.S. OFFICES:
Company owned offices
Company owned shared locations(1)
Total company owned offices
Franchise offices
Franchise shared locations(1)
Total franchise offices
INTERNATIONAL OFFICES:
Canada
Australia

2010

2011

2009

5,921
572

6,431
760

7,029
1,542

6,493
4,178
397
4,575
11,068

7,191
3,909
406
4,315
11,506

8,571
3,565
787
4,352
12,923

1,324
384
1,708

1,269
374
1,643

1,193
378
1,571

(1) Shared locations include offices located within Sears or other third party businesses. In 2009, these locations also included offices within Wal Mart

stores.

We sold 280, 267 and 76 company owned offices to franchisees in fiscal years 2011, 2010 and 2009, respectively. We closed more than
1,700 offices in fiscal year 2010, including over 1,000 offices in Wal Mart stores.
The acquisition of our last major independent franchise operator in fiscal year 2009 included a network of over 600 tax offices, nearly
two thirds of which converted to company owned offices upon the closing of the transaction, as reflected in the table above.
Offices in shared locations at April 30, 2011 and 2010 consist primarily of offices in Sears stores operated as "H&R Block at Sears."
The Sears license agreement expires in July 2012. Offices in shared locations at April 30, 2009 included offices in Wal Mart stores. The
Wal Mart agreement expired in May 2009.
SERVICE AND PRODUCT OFFERINGS – In addition to our retail offices, we offer a number of digital tax preparation alternatives.
By offering professional and do it yourself tax preparation options through multiple channels, we seek to serve our clients in the manner
they choose to be served.
We also offer clients a number of options for receiving their income tax refund, including a check directly from the IRS, an electronic
deposit directly to their bank account, a prepaid debit card or a RAC.
Software Products. We develop and market H&R Block At HomeTM income tax preparation software. H&R Block At HomeTM offers
a simple step by step tax preparation interview, data imports from money management
2 H&R BLOCK 2011 Form 10K

Table of Contents

software, calculations, completion of the appropriate tax forms, error checking and electronic filing. Our software products may be
purchased online, through third party retail stores or direct mail.
Online Tax Preparation. We offer a comprehensive range of online tax services, from tax advice to complete professional and do it
yourself tax return preparation and electronic filing, through our website at www.hrblock.com. This website allows clients to prepare their
federal and state income tax returns using the H&R Block At HomeTM Online Tax Program, access tax tips, advice and tax related news
and use calculators for tax planning.
We participate in the Free File Alliance (FFA). This alliance was created by the tax return preparation industry and the IRS, and allows
qualified filers with adjusted gross incomes less than $58,000 to prepare and file their federal return online at no charge. We feel this
program provides a valuable public service and increases our visibility with new clients, while also providing an opportunity to offer our
state return preparation and other services to these clients.
RACs. Refund Anticipation Checks are offered to U.S. clients who would like to either: (1) receive their refund faster and do not have
a bank account for the IRS to direct deposit their refund or (2) have their tax preparation fees paid directly out of their refund. A RAC is
not a loan and is provided by HRB Bank.
Emerald Advance Lines of Credit. EAs are offered to clients in tax offices from late November through early January, currently in
an amount not to exceed $1,000. If the borrower meets certain criteria as agreed in the loan terms, the line of credit can be increased and
utilized year round. These lines of credit are offered by HRB Bank.
H&R Block Prepaid Emerald Mastercard®. The H&R Block Prepaid Emerald MasterCard® allows a client to receive a tax refund
from the IRS directly on a prepaid debit card, or to direct RAC proceeds to the card to avoid high cost check cashing fees. The card can
be used for everyday purchases, bill payments and ATM withdrawals anywhere MasterCard® is accepted. Additional funds can be added
to the card account year round through direct deposit or at participating retail locations. The H&R Block Prepaid Emerald MasterCard®
is issued by HRB Bank.
Peace of Mind Guarantee. The Peace of Mind (POM) guarantee is offered to U.S. clients, in addition to our standard guarantee,
whereby we (1) represent our clients if audited by the IRS, and (2) assume the cost, subject to certain limits, of additional taxes owed by a
client resulting from errors attributable to one of our tax professionals' work. The POM program has a per client cumulative limit of
$5,500 in additional taxes assessed with respect to the federal, state and local tax returns we prepared for the taxable year covered by the
program.
Tax Return Preparation Courses. We offer income tax return preparation courses to the public, which teach students how to
prepare income tax returns and provide us with a source of trained tax professionals.
CashBack Program. We offer a refund discount (CashBack) program to our customers in Canada. In accordance with current
Canadian regulations, if a customer's tax return indicates the customer is entitled to a tax refund, we issue a check to the client in the
amount of the refund, less a discount. The client assigns to us the full amount of the tax refund to be issued by the Canada Revenue
Agency (CRA) and the refund check is then sent by the CRA directly to us. In accordance with the law, the discount is deemed to include
both the tax return preparation fee and the fee for tax refund discounting. This program is financed by short term borrowings. The
number of returns discounted under the CashBack program in fiscal year 2011 was 821,000, compared to 797,000 in 2010 and 782,000 in
2009.
LOAN PARTICIPATIONS – Since July 1996, we have been a party to agreements with HSBC and its predecessors to participate in
RALs provided by a lending bank to H&R Block tax clients. These agreements were effective through June 2011, but were terminated by
HSBC in December 2010. The impact of this is discussed in Item 7, under Tax Services operating results. During fiscal year 2006, we
signed new agreements with HSBC in which we obtained the right to purchase a 49.9% participation interest in all RALs obtained
through our retail offices. We received a signing bonus from HSBC during fiscal year 2006 in connection with these agreements, which
was recorded as deferred revenue and was earned over the contract term. Our purchases of the participation interests were financed
through short term borrowings. Revenue from our participation was calculated as the rate of participation multiplied by the fee paid by
the borrower to the lending bank. Our RAL participation revenue was $146.2 million and $139.8 million in fiscal years 2010 and 2009,
respectively.
SEASONALITY OF BUSINESS – Because most of our clients file their tax returns during the period from January through April of
each year, substantially all of our revenues from income tax return preparation and related services and products are earned during this
period. As a result, this segment generally operates at a loss through the first eight months of the fiscal year. Peak revenues occur during
the applicable tax season, as follows:
United States and Canada

January

Australia

July

April

October

H&R BLOCK 2011 Form 10K 3

Table of Contents

HRB Bank's operating results are subject to seasonal fluctuations primarily related to the offering of the H&R Block Prepaid Emerald
MasterCard® and Emerald Advance lines of credit, and therefore peak in January and February and taper off through the remainder of the
tax season.
COMPETITIVE CONDITIONS – We provide both retail and do it yourself tax preparation products and services and face substantial
competition throughout our businesses. The retail tax services business is highly competitive. There are a substantial number of tax return
preparation firms and accounting firms offering tax return preparation services, and we face significant competition from independent tax
preparers and CPAs. Certain firms are involved in providing electronic filing services, RALs and RACs to the public. Commercial tax
return preparers and electronic filers are highly competitive with regard to price and service and many firms offer services that may
include federal and/or state returns at no charge. Additionally, certain tax return preparers were able to offer RALs this tax season while
we were not. In terms of the number of offices and personal tax returns prepared and electronically filed in offices, online and via our
software, we are one of the largest providers of tax return preparation and electronic filing services in the U.S. We also believe we
operate the largest tax return preparation businesses in Canada and Australia.
Do it yourself tax preparation options include use of traditional paper forms, digital electronic forms and various forms of digital
electronic assistance, including online and desktop software both of which we offer. Our digital tax solutions businesses compete with a
number of companies. Based on tax return volumes, Intuit, Inc. is the largest supplier of tax preparation software and online tax
preparation services. Many other companies offer digital and online services. Price and marketing competition for digital tax preparation
services is intense among value and premium products and many firms offer services that may include federal and/or state returns at no
charge.
HRB Bank provides banking services primarily to our tax clients, both retail and digital, and for many of these clients, HRB Bank is the
only provider of banking services. HRB Bank does not seek to compete broadly with regional or national retail banks.
GOVERNMENT REGULATION – Federal legislation requires income tax return preparers to, among other things, set forth their
signatures and identification numbers on all tax returns prepared by them and retain all tax returns prepared by them for three years.
Federal laws also subject income tax return preparers to accuracy related penalties in connection with the preparation of income tax
returns. Preparers may be prohibited from further acting as income tax return preparers if they continuously and repeatedly engage in
specified misconduct.
The federal government regulates the electronic filing of income tax returns in part by requiring electronic filers to comply with all
publications and notices of the IRS applicable to electronic filing. We are required to provide certain electronic filing information to the
taxpayer and comply with advertising standards for electronic filers. We are also subject to possible monitoring by the IRS, penalties for
improper disclosure or use of income tax return preparation, other preparer penalties and suspension from the electronic filing program.
The Gramm Leach Bliley Act and related Federal Trade Commission (FTC) regulations require income tax preparers to adopt and
disclose consumer privacy policies, and provide consumers a reasonable opportunity to "opt out" of having personal information
disclosed to unaffiliated third parties for marketing purposes. Some states have adopted or proposed strict "opt in" requirements in
connection with use or disclosure of consumer information. In addition, the IRS generally prohibits the use or disclosure by tax return
preparers of taxpayer information without the prior written consent of the taxpayer.
Certain states have regulations and requirements relating to offering income tax courses. These requirements include licensing, bonding
and certain restrictions on advertising.
The IRS published final regulations in September 2010 that: (1) require all tax return preparers to use a Preparer Tax Identification
Number (PTIN) as their identifying number on federal tax returns filed after December 31, 2010; (2) require all tax return preparers to be
authorized to practice before the IRS as a prerequisite to obtaining or renewing a PTIN; (3) caused all previously issued PTINs to expire
on December 31, 2010 unless properly renewed; (4) allow the IRS to conduct tax compliance checks on tax return preparers; (5) define
the individuals who are considered "tax return preparers" for the PTIN requirement, and (6) set the amount of the PTIN user registration
fee at $64.25 per year. The IRS is also conducting background checks on PTIN applicants. The IRS plans to review the amount of the
PTIN user registration fee in the summer of 2011 and may adjust the fee amount. The IRS also published final regulations implementing
the individual e file mandate in March 2011.
Other changes are expected to be finalized in calendar year 2011. These include changes to: (1) establish a new class of practitioners
who are authorized to practice before the IRS under Circular 230, called "registered tax return preparers" who would be required to
(a) pass a competency examination as a prerequisite to becoming a registered tax return preparer, (b) complete annual continuing
professional education requirements, and (c) comply with ethical standards; (2) revise the amount of the enrolled agent application and
renewal fee; (3) set the amount of a sponsor fee for qualified continuing professional education sponsors; (4) set the amount of
4 H&R BLOCK 2011 Form 10K