updated 7/7/2005 4:30:18 PM ET 2005-07-07T20:30:18

One month after pledging to stanch the loss of customers from its digital tax business, H&R Block Inc. said Thursday it has acquired a small, online tax service company whose founders helped create the popular Turbo Tax software.

TaxNet Inc., of San Diego, formed last year by Tom Allanson and David Murray, launched its online tax preparation and filing program in January. Formerly with Intuit Inc.'s Turbo Tax division, Allanson and Murray will become H&R Block vice presidents specializing in digital tax services.

Terms of the acquisition were not disclosed. Spokesman Tom Linafelt noted that it will not affect Block's finances.

H&R Block will add TaxNet's online service to an existing lineup of digital tax products, retaining the features that TaxNet has touted as friendlier than those of other Web-based services.

"It does give us the opportunity to have what could be referred to as an alternative brand relationship with consumers," Linafelt said. "They may prefer TaxNet's innovative online product. It's easy to navigate, and it has this kind of `cool' factor that perhaps is less pronounced in our other H&R Block online products."

Despite branching out to such areas as mortgages and accounting in recent years, H&R Block continues to be fueled chiefly by its tax preparation business. For the year that ended April 30, earnings from the tax business rose 4 percent, to $663 million, while profits companywide slid 10.5 percent.

The number of tax customers at its offices and department store kiosks held steady in the latest fiscal year. But Block's digital tax business saw a 6.3 percent decline in customers, many of whom defected to free online services or competing software products.

"We were caught off-guard by these competitive actions and we will not allow that to happen again," chief operating officer Jeff Yabuki told analysts during a June 8 conference call.

While bringing Allanson and Murray to its Kansas City headquarters, H&R Block will maintain a tax technology development operation in San Diego, where TaxNet has seven other employees, Linafelt said.

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