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* Lawsuit alleges H&R Block ads mislead customers
* Lawsuit comes on eve of U.S. tax filing season
* H&R Block says stands by ads, to defend its claims (Adds H&R Block comment, updated shares)
By Jonathan Stempel
NEW YORK, Jan 31 (Reuters) - Jackson Hewitt Tax Service Inc JTX.N sued H&R Block Inc (HRB.N) to stop a new advertising campaign that it said misleads customers about tax refund loans and disparages Jackson Hewitt's competence.
Monday's lawsuit comes on the eve of the main U.S. tax filing season, a crucial period for the largest U.S. tax preparation companies because the February-to-April quarter accounts for roughly three-fifths of annual revenue and much of their profit.
Kate O'Neill Rauber, an H&R Block spokeswoman, in an email said: "This lawsuit was filed without any requests for substantiation. H&R Block stands behind our advertisements and will vigorously defend our claims."
Jackson Hewitt's lawsuit relates to "refund anticipation loans" -- short-term loans secured by taxpayers' expected tax refunds. Such loans carry fees and are popular among lower-income taxpayers.
Last month, H&R Block suffered a setback when the U.S. Treasury Department's Office of the Comptroller of the Currency ordered a partner, HSBC Holdings Plc (HSBA.L), to stop making tax refund loans to H&R Block customers.
Jackson Hewitt said that unlike its larger rival, it also offers taxpayers access to as much as $1,500 within one day.
According to the complaint filed in Manhattan federal court, H&R Block falsely claimed that its "Second Look Review" program, which reviews past tax returns prepared by rivals, found that two-thirds of returns prepared by Jackson Hewitt contained mistakes.
"H&R Block's 2 out of 3 claim necessarily implies the false claim that two out of three Jackson Hewitt customers who are entitled to refunds have been short-changed due to Jackson Hewitt errors or incompetence," the complaint said.
Jackson Hewitt also said H&R Block gives its agents a script designed to deceive them about its loan service.
Saying the campaign is causing "irreparable harm," Jackson Hewitt is seeking to halt the alleged improper advertising. It is also seeking compensatory and punitive damages.
H&R Block's advertisements "are designed to undermine trust in Jackson Hewitt," Jackson Hewitt Chief Executive Philip Sanford said in a statement.
Jackson Hewitt, based in Parsippany, New Jersey, said it prepared 2.53 million U.S. tax returns in 2010. H&R Block, based in Kansas City, Missouri. prepared 20.1 million U.S. returns in its 2010 fiscal year.
In afternoon trading on the New York Stock Exchange, Jackson Hewitt shares rose 1 cent to $1.58, and H&R Block shares fell 7 cents to $12.43.
The lawsuit is Jackson Hewitt Inc v. H&R Block Tax Services LLC, U.S. District Court, Southern District of New York, No. 11-00641. (Reporting by Jonathan Stempel, editing by Tim Dobbyn and John Wallace)