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PETERSON v. H & R BLOCK TAX SERVS.

July 10, 1997

BELINDA PETERSON, on behalf of herself and all others similarly situated, Plaintiff,
v.
H & R BLOCK TAX SERVICES, INC., a Missouri corporation, and JOHN DOES 1-10, Defendants.



The opinion of the court was delivered by: CASTILLO

 Plaintiff Belinda Peterson and the putative tax class *fn1" ("Peterson") allege that defendants H&R Block Tax Services, Inc. and ten of its corporate officers (collectively, "Block") solicited and charged customers for Block's "Rapid Refund" tax services despite knowing that these services were unavailable. Peterson claims that this scheme was intended to defraud Block's customers, and has made it the subject of a six-count complaint. Count I alleges that Block breached the terms of a contract to provide Peterson with accurate tax advice and breached obligations of good faith and fair dealing implied in the contract. Counts II and III add RICO claims; Count IV asserts a violation of the Illinois Consumer Fraud and Deceptive Practices Act; Count V claims breach of fiduciary duty; and Count VI seeks restitution. Block's motion to dismiss Counts I and V for failure to state a claim upon which relief may be granted is presently before the Court.

 LEGAL STANDARDS

 A motion to dismiss tests the sufficiency of the complaint, not the merits of the suit. Triad Assoc. Inc. v. Chicago Housing Auth., 892 F.2d 583, 586 (7th Cir. 1989). When considering a motion to dismiss, the Court views all facts alleged in the complaint, as well as any inferences reasonably drawn from them, in the light most favorable to the plaintiff. Mosley v. Klincar, 947 F.2d 1338, 1339 (7th Cir. 1991). A motion to dismiss will be denied unless it appears beyond doubt that the plaintiff can prove no facts which would entitle him or her to relief. Conley v. Gibson, 355 U.S. 41, 45, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).

 RELEVANT FACTS

 The following facts are drawn from Peterson's amended complaint. Block provides tax return preparation services to the public and, as part of that business, offers electronic tax return filing and refund anticipation loans ("RALs"). Amd. Cmplt. P 10. These services are advertised and represented to the public as "Rapid Refund." Id. Electronic filing means transmitting tax returns to the IRS via computer rather than through the mail. RALs are loans issued by banks in the amount of the taxpayer's anticipated federal tax refund. Participating national banks contract with Block to make RALs to Block's electronic filing customers, and repayment is secured by the actual refund from the IRS. Id. For payment of a specified fee, Block's electronic filing customers can apply for RALs while at a Block office obtaining tax preparation services. Id. P 18. Block allegedly endeavors to provide each customer with professional advice on their eligibility for RALs. Id. P 17.

 In January 1995, Peterson entered a Block office located in Forest Park, Illinois. Id. P 11. With her, she brought the information that Block would need to complete her 1994 state and federal income tax returns. During her visit, a Block employee presented Peterson with a pamphlet entitled "ServicePlus," which informed Peterson, among other things, that Block would "describe how Rapid Refund works for you." *fn2" Id. P 16, Ex. B. *fn3" Block then gave Peterson a schedule of RAL fees corresponding to the amount and timing of anticipated refunds. Id. P 18, Ex. C. The schedule explained how Peterson could obtain the greater portion of her refund in the fastest time by paying $ 155.50 -- the highest RAL fee. By paying $ 100.50 -- the second highest fee -- Peterson could obtain a modest portion of her refund in the fastest time, and the balance within three weeks. Finally, Peterson could obtain the entire balance of her refund within three weeks by paying $ 51.50 -- the lowest fee. Id. P 20. Although the Fact Sheet warns that the bank issuing the RAL may limit loans in some cases or reduce the loan if the taxpayer claims an earned income tax credit (EITC), *fn4" the Fact Sheet does not anticipate refunds taking longer than three weeks. Id.

 Based upon the representations that Block made in these materials, Peterson authorized Block to start preparing her tax returns. Id. P 23. In the process, Block determined that Peterson was eligible for an EITC. Id. P 21. In addition to purchasing tax preparation services, Peterson applied for Block's RAL program. *fn5" Id. P 23. She paid a $ 100.50 fee, so that she could receive an immediate refund of $ 399.50 and a second refund check of $ 2,436.00. *fn6" Id. Block informed Peterson that she would get the second refund check in two or three weeks. Id. PP 22, 23. She did not. *fn7" Id. P 28. Instead, Peterson's refund was delayed as a result of the IRS's decision to review all 1994 tax year returns claiming an EITC in an effort to combat fraudulent EITC claims. Id. P 28, Ex. D. The IRS sent Peterson a letter on February 20, 1995, a few weeks after she had filed her return. Id. The letter explained that the remainder of her refund -- her second refund check -- would be delayed for at least eight weeks because she had claimed an EITC. Id.

 At the time that it prepared Peterson's tax return and charged her for its Rapid Refund service, Block allegedly knew that Peterson could not obtain a Rapid Refund because refunds for customers claiming an EITC were being delayed by the IRS for at least eight weeks. Id. PP 24, 33. In short, Peterson claims that Block knew persons claiming EITCs were ineligible for RAL but charged them for it anyway. Although Block allegedly failed to disclose this information to its customers, Block later informed its shareholders. Id. P 35. In its Form 10-K dated July 28, 1995, Block stated, "During the 1995 tax season, the IRS made further changes to its electronic return processing systems and procedures to crack down on taxpayer fraud believed to be associated with the earned income tax credit claimed on returns. These changes resulted in delays in the IRS's issuance of refunds associated with the EITC . . . RAL's were not made available on the portion of the refund amount attributable to the EITC." Id. P 35, Ex. A.

 In Count I of her complaint, Peterson contends that Block breached a contract to provide accurate tax advice, as well as the obligations of good faith and fair dealing implied in the contract, by selling the Rapid Refund service to customers who were not eligible for it. Peterson further claims, in Count V of her complaint, that Block breached its fiduciary duty as a professional tax adviser to the class members by misrepresenting RAL services for the purpose of advancing Block's own interests. Block moves to dismiss both Counts under Rule 12(b)(6) for failure to state a claim.

 ANALYSIS

 I. Count I -- Breach of Contract

 Peterson's breach of contract claim alleges that Block contracted with her to provide accurate tax advice, particularly with regard to RAL availability, through its ServicePlus pamphlet and RAL Fact Sheet. In exchange, Peterson paid the $ 100.50 RAL fee, expecting to receive this service as promised. By soliciting and charging Peterson for RAL when it knew she did not qualify for the service, Block allegedly breached its express contractual obligations, as well as covenants of good faith and fair dealing implied in the contract.

 Block responds initially that the Court should dismiss Count I because Block has no contract with Peterson; rather, the only contract formed was the loan contract between Peterson and the lending bank. After all, Block points out, the Bank is clearly identified in both the loan contract and RAL application as the lender -- in other words, as the entity responsible for issuing the RALs. Moreover, the RAL Fact Sheet warns that the Bank has the authority to limit loans or reduce the amount of the RAL for applicants claiming an EITC. ...


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