2012 Widely Held Fixed Investment Trust (WHFIT) Guide

Transcription

1 2012 Widely Held Fixed Investment Trust (WHFIT) Guide The purpose of this 2012 Tax Guide supplement is to inform you of the Internal Revenue Service (IRS) regulations for Widely Held Fixed Investment Trusts (WHFITs).

2 Outside the realm of income reclassification, the Internal Revenue Service (IRS) has implemented additional regulations that will cause a material difference between the cash receipts shown on your 2012 monthly statements and your final Consolidated Reporting statement. If you were invested in any of the following securities listed below you may see supplemental information appear on your : Unit investment trusts organized as grantor trusts Royalty trusts Commodity trusts Holding Company Depositary Receipts (HOLDRs) trusts Mortgage backed pass-through pools As defined by the IRS, these securities are structured as grantor trusts portfolios where you hold the underlying assets, otherwise known as direct ownership which, under the Widely Held Fixed Investment Trust (WHFIT) regulations, change the way you recognize income, expenses and gains. In an effort to reduce further gaps in income reporting, the IRS requires you to be liable for taxes on your share of income and proceeds received by these grantor trusts, regardless of whether these distributions were paid to you. Definition A WHFIT is a trust that purchases a fixed portfolio of assets for the life of the trust and issues units in the trust to investors. WHFITs are divided into two major subcategories: Non-Mortgage Widely Held Fixed Investment Trusts (NMWHFITs) and Widely Held Mortgage Trusts (WHMTs). NMWHFITs primarily include unit investment trusts organized as grantor trusts, royalty trusts, commodity trusts, and Holding Company Depositary Receipts (HOLDRS) trusts. Widely Held Mortgage Trusts are WHFITs whose underlying assets consist of but are not limited to mortgages, regular interests in a Real Estate Mortgage Investment Conduit (REMIC) and interests in another WHMT. These include mortgage-backed pass through pools issued by the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA). Reason for Change in Reporting Grantor trusts identified by the IRS as WHFITs are pass-through investments for tax purposes, and involve three major stakeholders: 1. Trustees (the institutions who manage the trust) 2. Middlemen (the broker/dealers who hold the trust on your behalf) 3. You, the beneficial owner, who is also known as a trust interest holder (TIH) While income earned by the trust flows through to you, trustees appointed to maintain the trust are not in direct contact with you since your portfolio is held WIDELY HELD FIXED INCOME TRUST (WHFIT) GUIDE

3 by LPL Financial. Therefore, information regarding any taxable income recognized by the trust previously could not be communicated to you and, as a result, could not be reported to the IRS. To account for this, the WHFIT regulations require trustees to share this tax information with broker/dealers like LPL Financial, and for broker/ dealers to report these tax liabilities to you and the IRS. The Requirements Sections (d) and (e) of the Income Tax Regulations require LPL Financial to file a Form 1099 with the IRS and to furnish an additional tax information statement to you for those trust interests LPL Financial holds on your behalf. LPL Financial is responsible for including in the summary totals of the 1099s all gross income and proceeds collected by the trust and allocated to you on a pro rata basis. The income is grossed up to account for expenses and/or fees. This includes but is not limited to interest, dividend and miscellaneous income, such as rental and royalty payments. Principal repayments (where you received part of your investment back) will now also be reported on Form 1099-B. Proceeds from each sale of an asset will be reported once the trust receives payments on the underlying assets, and not when the payments are distributed to you. This is known as receipt-based reporting, which differs from the distribution-based reporting approach taken in previous years. In some cases, such as with commodity trusts, no distributions are paid to you, as the proceeds recognized from selling assets are used to pay the expenses of the trust. This receipt-based reporting is accompanied by a ratio that tells you what portion of your current basis in the trust is applied to the proceeds for gain/loss reporting. This ratio, known as a Cost Basis Allocation Factor, will appear on Form 1099-B, and will assist you in determining your adjusted cost basis. A Transaction Type column will also appear to indicate the type of event that occurred. If you were invested in a NMWHFIT, you will find this information broken out in a new section added to the 1099-B titled Principal Payments From Non-Mortgage Widely Held Fixed Investment Trusts. Non-Mortgage Widely Held Fixed Investment Trusts Unit Investment Trusts Organized as Grantor Trusts A unit investment trust (UIT) set up as a grantor trust represents interest in a trust that holds a specified group of stocks, bonds, U.S. government securities, currencies, foreign securities, options, or other assets. Some exchange-traded funds (ETFs) are structured as UITs. In general, a UIT is an unmanaged portfolio that employs a buy and hold strategy. The assets are not actively traded but remain fixed until they mature or have reached the trust s termination date (the date when the UIT will terminate and dissolve), and investors recover their principal or proceeds. Some UITs may sell or replace a security under certain circumstances, such as if the issuer is undergoing litigation, or if the issuer s financial viability or security s credit ratings are called into question. Income and expenses of the trust are recognized when they are earned or incurred, and not when they are received or paid in cash. Therefore UIT income is grossed up for these trust expenses. Investment expenses generally relate to the operation of the trust and include portfolio supervision, administration, evaluation, bookkeeping and trustee fees. These can be used as a deduction on IRS Form Organizational expenses are mainly related to expenses in setting up the trust. These include preparing registration statements, indentures, etc., and may be offset against reportable income. These should be added to the cost basis of your units to reduce capital gains at sale or redemption. Other UIT instruments accrue Original Issue Discount (OID), which must also be calculated and reported to you. Commodity Trusts A commodity trust represents interest in a trust that holds precious metals such as gold, silver, etc. Commodity trusts do not pay cash distributions. However, assets of the trust (such as gold, silver, etc.) are sold to cover expenses. LPL Financial will report proceeds for these sales and offsetting expenses. Some common commodity trusts are SPDR Gold Trust ETF (Ticker: GLD), and Ishares Silver Trust ETF (Ticker: SLV). An excerpt from GLD s prospectus on page 30 states: 3

4 United States Federal Tax Consequences When the Trust sells gold, for example to pay expenses, a Shareholder generally will recognize gain or loss in an amount equal to the difference between (1) the Shareholder s pro rata share of the amount realized by the Trust upon the sale and (2) the Shareholder s tax basis for its pro rata share of the gold that was sold, which gain or loss will generally be long-term or short-term capital gain or loss, depending upon whether the Shareholder has held its Shares for more than one year. A Shareholder s tax basis for its share of any gold sold by the Trust generally will be determined by multiplying the Shareholder s total basis for its share of all of the gold held in the Trust immediately prior to the sale, by a fraction the numerator of which is the amount of gold sold, and the denominator of which is the total amount of the gold held in the Trust immediately prior to the sale. After any such sale, a Shareholder s tax basis for its pro rata share of the gold remaining in the Trust will be equal to its tax basis for its share of the total amount of the gold held in the Trust immediately prior to the sale, less the portion of such basis allocable to its share of the gold that was sold. De Minimis Rule: In the event these trusts sell a nominal amount of commodities to pay for the trust s expenses and make no distributions of sale proceeds to investors, the trusts are not required to pass reporting information to LPL Financial, per Treas. Reg. Sec (c)(2)(iv)(B). Please note that an investor will be subject to the higher long-term capital gains rate of 28%, rather than the standard long term gain rate (generally 15%) when commodity trust units held over one year are disposed, due to underlying assets in commodity trusts being 100% collectibles. Holding Company Depositary Receipts (HOLDRs) Trusts A HOLDRs trust represents interest in a trust which holds a specified group of stocks. Some common HOLDRs trusts are Oil Service HOLDRS Trust Depositary Receipt (Ticker: OIH) and Semiconductor HOLDRS Trust Depositary Receipt (Ticker: SMH). An excerpt from OIH s prospectus on page 26 states: Taxation of the trust The trust will provide for flow through tax consequences as it will be treated as a grantor trust or custodial arrangement for U.S. federal income tax purposes. Taxation of Oil Service HOLDRS A U.S. receipt holder purchasing and owning Oil Service HOLDRS will be treated, for U.S. federal income tax purposes, as directly owning a proportionate share of the underlying securities represented by Oil Service HOLDRS. Consequently, if there is a taxable cash distribution on an underlying security, a U.S. receipt holder will recognize income with respect to the distribution at the time the distribution is received by the trustee, not at the time that the U.S. receipt holder receives the cash distribution from the trustee. Royalty Trusts A royalty trust represents interest in the profits from properties producing gas, oil or minerals. Common royalty trusts are BP Prudhoe Bay Royalty Trust (BPT) and Hugoton Royalty Trust (HGT). An excerpt from BPT s prospectus on page 26 states: Taxation of Unit Holders In computing his federal income tax liability, each Unit holder is required to take into account his share of all items of Trust income, gain, loss, deduction, credit and tax preference, based on the Unit holder s method of accounting. Consequently, it is possible that in any year a Unit holder s share of the taxable income of the Trust may exceed the cash actually distributed to him in that year. For example, if the Trustee should establish a reserve or borrow money to satisfy debts and liabilities of the Trust income used to establish the reserve or to repay the loan must be reported by the Unit holder, even though the income is not distributed to the Unit holder. The Trust makes quarterly distributions to Unit holders of record on each Quarterly Record date. The terms of the Trust Agreement seek to assure to the extent practicable that income, expenses and deductions attributable to each distribution are reportable by the Unit holder who receives the distribution WIDELY HELD FIXED INCOME TRUST (WHFIT) GUIDE

5 Cost Basis Frequently Asked Questions Regarding UITs Grantor Trust UIT: 1. If I buy a grantor trust UIT in 2012, under Cost Basis Legislation the UIT is noncovered always (because grantor trusts fall under WHFIT regs). Correct? Correct. 2. If I take an in-kind distribution, the exchange of the grantor trust UIT for the underlying securities is non-taxable. Therefore, the acquisition date for each of the underlying securities received in the inkind distribution should be the acquisition date of when I bought the UIT originally (and not the date when I took the in-kind distribution). Correct? Correct. The in-kind distribution is generally nontaxable, although gain/loss will need to be calculated on the portion of the in-kind distribution which includes cash. The acquisition date for each of the underlying securities received in the in-kind distribution carries over to the unit holder from the UIT and is not reset at the date of distribution. 3. How does LPL Financial get the adjusted cost basis to apply to each of the underlying securities received in an in-kind distribution? Upon request, the UIT sponsor should provide a statement which reflects the adjusted cost basis price of the UIT holdings on the Redemption In Kind Date, based on the original purchase date of the units, to aid in the calculation. 4. I am aware that First Trust began changing the structure of any future UITs from WHFITs to RICs. However, I was informed not all UITs will be able to convert. Can you specify which kind and why? Are there certain limitations with RICs? And if so, what are they? RICs have portfolio diversification requirements that must be met, so typically First Trust will not structure a trust as a RIC if they put fewer than 25 securities in the portfolio. Certain securities do not have to abide by that as they are already diversified, so RICs with underlying RICs are automatically diversified. On a side note, the California Closed End portfolios must remain Grantor Trusts as California law doesn t allow for the income to be CA tax free on a RIC that contains RICs. RIC UIT: 1. If I purchased RIC UITs in 2012, under Cost Basis Legislation the UITs, including UITs in DRPs, are covered in Correct? Correct. UITs have been considered covered under Cost Basis Legislation since 2011, unless the UITs were in DRPs, which became covered in Regardless of the year, UITs are not eligible for average cost unless participating in a DRP, correct? Correct. 3. If I take an in-kind distribution, the exchange of the RIC UIT for the underlying securities is taxable. Therefore, the acquisition date for each of the underlying securities received in the inkind distribution should be the date of the in-kind distribution (and not the original date I bought the UIT). Correct? Correct. 4. How does LPL Financial obtain the adjusted cost basis to apply to each of the underlying securities received in an in-kind distribution? Basis is determined based on the fair value of the securities received. This information is provided by the Trustee. 5. Are the underlying securities received from the inkind distribution considered covered or noncovered? Since the receipt of the securities in the in-kind distribution is a taxable event, deemed to have been acquired for cash under the cost basis rules, the determination will be the same as any other cash acquisition in an account. Generally, stocks received would be considered covered (effective since 2011) and securities in an eligible DRP became covered in Examples of trusts which will remain Grantor Trusts are: Target 10, Target Dividend, Nasdaq 15, Global 15, MSCI EAFE, etc. 5

6 1099-MISC box 2012 IRS 1099 CONSOLIDATED REPORTING STATEMENT LPL Financial Member FINRA / SIPC 9785 Towne Centre Drive San Diego, CA Federal ID No: FP 1 B 1 1 A **5 DGT INFORMATION LINE (OPTIONAL) JOHN A INVESTOR C/O LINE DELIVERY ADDRESS DELIVERY ADDRESS ANYTOWN ST Recipient s Tax Identi cation Number: Account Number: Courtesy Form Corrected on 02/20/12 Your Financial Advisor Copy B For Recipient Department of the Treasury - Internal Revenue Service (keep for your records) This statement is being provided for your information only and generally will not be furnished to the Internal Revenue Service. However, this reporting exemption does not apply for any payments listed in 1099-MISC Box 8 and any tax credit bonds listed on Form 1099-INT. If you are required to le a return, a negligence penalty or other sanction may be imposed on you if this income is taxable and the IRS determines that it has not been reported. John Representative (999) Rep ID: 44FB Document Samples designed and produced by DST Output using Digital Press Technology PROPRIETARY AND CONFIDENTIAL: Not to be disclosed to third parties or used for other than recipient s own internal purpose. The statement appearance will differ from this Conceptual Design based on paper and DST Output production line. Image(s): Copyright 2011 Shutterstock, Inc. & Jupiterimages Corporation. FORM 1099-DIV DIVIDENDS AND DISTRIBUTIONS OMB # TOTALS FOR TAX YEAR 2012 IRS BOX 1A. TOTAL ORDINARY DIVIDENDS $90, B. QUALIFIED DIVIDENDS $24, A. TOTAL CAPITAL GAIN DISTRIBUTIONS $30, B. UNRECAP. SEC GAIN $0.00 2C. SECTION 1202 GAIN $0.00 2D. COLLECTIBLES (28%) GAIN $ NONDIVIDEND DISTRIBUTIONS $3, FEDERAL INCOME TAX WITHHELD $ INVESTMENT EXPENSES $ FOREIGN TAX PAID $ FOREIGN COUNTRY OR U.S. POSSESSION VARIOUS 8. CASH LIQUIDATION DISTRIBUTIONS $28, NONCASH LIQUIDATION DISTRIBUTIONS $ EXEMPT-INTEREST DIVIDENDS $ SPECIFIED PRIVATE ACTIVITY BOND INTEREST DIVIDENDS $ STATE N/A 13. STATE IDENTIFICATION NO N/A 14. STATE TAX WITHHELD $ FORM 1099-MISC MISCELLANEOUS INCOME OMB # TOTALS FOR TAX YEAR 2012 IRS BOX 1. RENTS $ ROYALTIES $ OTHER INCOME $ FEDERAL INCOME TAX WITHHELD $ SUBSTITUTE PAYMENTS IN LIEU OF DIVIDENDS OR INTEREST $ STATE TAX WITHHELD $ STATE IDENTIFICATION NO N/A ENV* FORM 1099-INT INTEREST INCOME OMB # TOTALS FOR TAX YEAR 2012 IRS BOX 1. INTEREST INCOME $6, EARLY WITHDRAWAL PENALTY $ INTEREST ON U.S. SAVINGS BONDS & TREAS. OBLIGATIONS $1, FEDERAL INCOME TAX WITHHELD $ INVESTMENT EXPENSES $ FOREIGN TAX PAID $ FOREIGN COUNTRY OR U.S. POSSESSION N/A 8. TAX-EXEMPT INTEREST $ SPECIFIED PRIVATE ACTIVITY BOND INTEREST $ TAX-EXEMPT BOND CUSIP NO VARIOUS 11. STATE SEE DETAILS 12. STATE IDENTIFICATION NO SEE DETAILS 13. STATE TAX WITHHELD $0.00 FORM 1099-OID ORIGINAL ISSUE DISCOUNT OMB # TOTALS FOR TAX YEAR 2012 IRS BOX 1. ORIGINAL ISSUE DISCOUNT FOR $ OTHER PERIODIC INTEREST $ EARLY WITHDRAWAL PENALTY $ FEDERAL INCOME TAX WITHHELD $ ORIGINAL ISSUE DISCOUNT ON U.S. TREASURY OBLIGATIONS * $ INVESTMENT EXPENSES $ STATE N/A 9. STATE IDENTIFICATION NO $ STATE TAX WITHHELD $ Per IRS 1099-DIV Instructions for Box 1A, includes net short-term capital gain distributions from mutual funds; (New!) Tax-exempt dividends will now report on 1099-DIV Box 10. * This may or may not be the correct gure to report on your income tax return. See instructions on the last page. 1 The amount shown in 1099-MISC box 2 represents royalty payments made by royalty trusts before reduction for severance and other taxes have been withheld. As royalty trusts fall under WHFIT regulations, adjustments for these royalty trusts may be included in boxes 1 and 2 under rents and royalties respectively. Certain royalty income may be treated as gain from the sale or exchanges of assets used in a trade or business under Code Section 1231, thereby qualifying for capital gains treatment. This may need to be included on your return using IRS Form 4797 Sales of Business Property. Qualified stated interest received by the trustee will be reported in box 1 of the 1099-INT. Other assets within royalty trusts may be treated as indebtedness subject to Treasury Regulations applicable to contingent payment debt instruments (CPDI). As a result, an actual payment or OID shortfall may be recognized, which represents the difference between the projected contingent payment and actual contingent payment, and reported in box 6 of the Non-Federally Reported Items section of your 1099 Consolidated Reporting Statement. Trust administrative expenses, severance tax and basis adjustments associated with rental or royalty income generated by the trust will also be found in the Non-Federally Reported Items section, and may be deductible on your Schedule E Supplemental Income and Loss. Severance tax is imposed by the state on the removal of nonrenewable resources. Please note that if you were invested in a royalty trust, a separate tax booklet, containing tax information such as depletion schedules, historical information, state income tax deductions and credits, and state apportionments will be mailed to you in March 2013, when made available by the issuers WIDELY HELD FIXED INCOME TRUST (WHFIT) GUIDE

7 Proceeds from Broker and Barter Exchange Transactions (1099-B) 1099-B DETAILS - PROCEEDS FROM SALE TRADES OR EXCHANGES AND TAX WITHHELD Account Number: The proceeds stated on this page are reported net of option premiums. However, option premiums are built into the gain or loss amounts computed below. If you have securities sold because of the exercise of an option granted or acquired before 2013, we have included option premium information as a separate column on this page, to help you reconcile to the gain/loss amount shown on this statement. Should you elect to report net of option premiums, you must adjust your gain/loss amounts on your Form GROSS PROCEEDS WASH SALE DATE OF (LESS COMMISSIONS AMOUNT WASH SALE COLLECTIBLES DATE OF SALE OR AND OPTION COST OR OPTION ADJUSTMENT LOSS ALLOCATION SECURITY DESCRIPTION CUSIP ACQUISITION EXCHANGE PREMIUMS) OTHER BASIS GAIN OR (LOSS) PREMIUM TO BASIS 2 DISALLOWED 3 FACTOR (CAF) 4 (BOX 8) (BOX 1D) (BOX 1B) (BOX 1A) (BOX 2A) (BOX 3) (BOX 5) SHORT-TERM CAPITAL GAINS OR LOSSES - ASSETS HELD ONE YEAR OR LESS (BOX 1C) 2 COVERED (BOX 6B): FORM 8949 WITH BASIS REPORTED TO THE IRS UCB B /5/ /21/11 23, , , QTY (BOX 1E): BERKSHIRE HATHAWAY INC /11/11 05/10/10 1,234, ,050, , QTY (BOX 1E): WAL-MART STORES INC /08/11 11/30/11 284, , (12,150.00) ,150.00) TOTAL SHORT-TERM COVERED 1,260, ,071, , (12,150.00) NON-COVERED 1 (BOX 6A): FORM 8949 (BOX B) WITH BASIS NOT REPORTED TO THE IRS ANHEUSER BUSCH INBEV SA B6399C107 07/08/10 07/08/11 115, , , QTY (BOX 1E): VANGUARD INTL GRTH INVS /05/11 05/29/11 50, , , QTY (BOX 1E): VANGRD HI YLD CORP INVS /04/11 11/17/11 7, , (105.00) QTY (BOX 1E): XYZ MUTUAL FUND 12XYZ /01/11 12/07/ , , (37,850.00) , (37,850.00) QTY (BOX 1E): TOTAL SHORT-TERM NON-COVERED 173, , , , (37,850.00) LONG-TERM CAPITAL GAINS OR LOSSES - ASSETS HELD MORE THAN ONE YEAR (BOX 1C) COVERED (BOX 6B): FORM 8949 WITH BASIS REPORTED TO THE IRS FT INFLTN HEDGE 2 FE RE 30273E585 09/28/11 24, , , QTY (BOX 1E): XYZ MUTUAL FUND 12XYZ /01/11 12/07/ , , (37,850.00) (37,850.00) QTY (BOX 1E): TOTAL LONG-TERM COVERED 24, , , (37,850.00) 1 These securities are not covered under the 1st and 2nd phases of the Cost Basis accounting legislations passed by Congress on October 3, Therefore the cost basis, acquisition date, disallowed loss from wash sales, and holding period are not being reported to the IRS for these securities. Please refer to the Tax Guide online for more information on covered securities. 2 Please note that the amount displayed in this column is included in the amount listed in the Cost Or Other Basis column. If there is a wash sale adjustment amount displayed, your holding period includes the holding period of the stock or securities that were previously sold, where the loss deduction was postponed or disallowed. 3 The amounts listed in this column represent the losses you incurred from wash sales that cannot be deducted from your tax return. 4 Collectibles Allocation Factor (CAF): Represents the percentage of proceeds associated with UIT grantor trusts you sold in 2012 that contain assets considered collectibles, which is subject to a higher long-term capital gains rate f 28% h it h ld 1 di d Pl f t th 2012 WHFIT G id li f d t il Grantor UITs with underlying Collectibles assets 2 Generally, collectibles gain or loss comes from the sale or trade of a work of art, rug, antique, metal (such as gold, silver and platinum bullion), gem, stamp, coin or alcoholic beverage held more than one year. Collectibles gain includes gain from the sale of an interest in a partnership, S corporation or trust due to unrealized appreciation of collectibles. Long-term capital gains generated from collectibles (such as commodity trusts) are taxed at a rate of 28% when units held over one year are sold. When investors purchase or sell units of these grantor UITs, the investors must know the portion of the trust holdings that represent assets considered collectibles on the purchase date and sales date in order to properly recognize gain or loss. Therefore, a Collectible Allocation Factor (CAF) has been added to represent the percentage of basis or proceeds that is associated with collectibles. For commodity trusts, the Collectible Allocation Factor is always 100% or However, for non-commodity grantor trusts that invest a portion of their portfolio in commodity trusts, this factor will vary and will display separately on the 1099-B for sales of these trusts. For purchases of these trusts made in 2012, the Collectible Allocation Factor will appear in the Non-Federally Reported Items section, and you will need to retain this information for future gain or loss reporting. 7

8 Principal Payments from Non-Mortgage Widely Held Fixed Investment Trusts 1099-B DETAILS - PRINCIPAL PAYMENTS FROM NON-MORTGAGE WIDELY HELD FIXED INVESTMENT TRUSTS Account Number: Please refer to the Important Tax Information disclosure in the Summary section regarding the additional Widely Held Mortgage Trust (WHMT) statement that will be mailed to you by March 15, A separate 1099-B, related to WHMTs, will contain information released by issuers in March 2013, and will need to be added to the 1099-B box totals listed on this form. The total amounts listed on both statements must be included on your tax return. The issuers for the payments below include Unit Investment Trusts, Holding Company Depositary Receipts Trusts, Commodity Trusts and Royalty Trusts, which are treated as grantor trusts and fall under WHFIT regulations, as de ned by The information provided to you in this section was obtained from the issuer, its trustee or an agent of the issuer. Some or all of a distribution paid as late as March 2013 may be recognized as income for the 2012 tax year. With these trusts, sales are reported by when the trust sells the assets within its portfolio. In some cases, proceeds from these sales were used to pay the trust s expenses, which may have resulted in no distributions paid to you. Expenses and other adjustments associated with these assets can be found in the Non-Federally Reported Items section, which may be deductible on your tax return on Schedules A or E (if applicable) or may impact your cost basis on Schedule D. Please review this information with your tax advisor. COST BASIS SECURITY DESCRIPTION CUSIP DATE 1 PROCEEDS AMOUNT TRANSACTION TYPE ALLOCATION FACTOR 3 2 (BOX 8) (BOX 1D) (BOX 1A) (BOX 2) (IF APPLICABLE) FT BAL INC SLT 5 CA MO /30/11 1, PRINCIPAL DISTRIBUTION QTY (BOX 1E): FT BAL INC SLT 5 CA MO /31/11 1, PRINCIPAL DISTRIBUTION QTY (BOX 1E): FT BAL INC SLT 5 CA MO /08/11 2, REDEMPTION QTY (BOX 1E): FT HIGH YLD INC CE 9 CA 30268H288 01/30/ RECEIPT (REPORTABLE SALE) 0.32 QTY (BOX 1E): FT HIGH YLD INC CE 9 CA 30268H288 02/27/ RECEIPT (REPORTABLE SALE) 0.45 QTY (BOX 1E): FT HIGH YLD INC CE 9 CA 30268H288 03/31/ RECEIPT (REPORTABLE SALE) 0.06 QTY (BOX 1E): FT MUN CLSD 11 MO FEE CA 30268H346 01/25/ PRINCIPAL DISTRIBUTION QTY (BOX 1E): FT MUN CLSD 11 MO FEE CA 30268H346 05/29/ PRINCIPAL DISTRIBUTION QTY (BOX 1E): FT MUN CLSD 11 MO FEE CA 30268H346 11/17/ PRINCIPAL (TERMINATION) QTY (BOX 1E): TOTAL PRINCIPAL PAYMENTS FROM NON-MORTGAGE WIDELY HELD FIXED INVESTMENT TRUSTS (BOX 2A) $4, Date: Proceeds from WHFITS are reportable by when they are received by the trust, regardless of when they are paid to you. 2 Cost Basis Allocation Factor: This factor represents the ratio of assets sold divided by the total net asset value of the trust, and tells you what portion of your current basis in the trust is to be applied to the proceeds for gain/loss reporting. This factor allows you to calculate your new adjusted basis. Under , LPL Financial is required to provide you this ratio for your adjusted basis calculation. This third section of the 1099-B will contain sale transactions made by the trusts, which will be reported by the date and gross amount the trust sold the assets for, and not by the date and amount of proceeds that 3 were paid to you. Some or all of the distributions made as late as March 2013 may be recognized as income for the 2012 tax year. A Cost Basis Allocation Factor (CBAF) is included to indicate what portion of your current basis in the trust should be applied to the proceeds for gain/loss reporting. Transaction types will also be identified to indicate the type of event that occurred. Incurred expenses and other adjustments associated with these assets will be found in the Non- Federally Reported Items section, and may be deductible on your return. The primary difference between the Cost Basis Allocation Factor (CBAF) and Collectibles Allocation Factor (CAF) is that the CBAF is furnished when the trust sells assets within the portfolio and the CAF is furnished when the investor sells units of a portfolio that contains collectibles WIDELY HELD FIXED INCOME TRUST (WHFIT) GUIDE

9 Additional Information & Items Not Reported to the IRS NON-FEDERALLY REPORTED ITEMS SECTION DETAILS - NON-FEDERALLY REPORTED ITEMS Account Number: Please refer to the Important Tax Information disclosure in the Summary section regarding the additional Widely Held Mortgage Trust (WHMT) statement that will be mailed to you by March 15, A separate statement listing other non-federally reported items in relation to WHMTs will contain information released by issuers in March A Form Schedule K-1 should be mailed to you directly from the General Partner, reporting your pro rata share of the partnership s taxable income. Although the partnership generally is not subject to income tax, you are liable for tax on your share of partnership income, whether or not distributed. Please use the Schedule K-1 to include your share of income on your tax return. The information on this statement only represents cash distributions you received from the partnership, but is not classi ed as taxable or dividend income, and is instead considered a return of capital (adjustment to your basis). This section lists non-federally reported items, which may be useful when preparing your tax return. These items may or may not be taxable at the state or local level. Please review this information with your tax advisor. If you have OID shortfall listed, this calculation is based on the period you held these assets with LPL Financial during tax year Please consult with your tax professional to determine if an adjustment may be required. 4 COLLECTIBLES DESCRIPTION CUSIP DATE ACTIVITY QUANTITY PRICE AMOUNT OPTION ALLOCATION NFR BOX PREMIUM FACTOR (CAF) AEI INCOME & GROWTH FD /19/11 OPT PREM BRASKEM SA ADR REP PFD A /01/11 INV EXP-PROCEEDS (10,536.45) 7 COMARCO INC /08/11 OPT PREM. 1, , COMARCO INC /08/11 ADD TO BASIS 1, , SUBTOTAL 645, GROUPE BRUXELLES LAMBERT /12/11 OID ON MUNI , MARGIN DEBIT INTEREST /01/11 MARGIN INTEREST , MARGIN DEBIT INTEREST /01/11 DIVIDEND , CASH DEBIT INTEREST /19/11 CASH DEBIT INT , SUBTOTAL 2,167, PURCHASES ABC CORP /01/11 PURCHASE , FT INFLTN HEDG PRT CA MO /01/11 PURCHASE , FT INFLTN HEDG PRT CA MO /01/11 PURCHASE , SUBTOTAL 400, Adjustments related to WHFIT reporting, such as investment interest expenses, severance tax and basis 4 adjustments are not reported to the IRS but are included in the Non-Federally Reported Items section for your information as it may be deductible on Schedules A or E of your return. Some adjustments may be subject to the 2% Adjusted Gross Income (AGI) limitation. Please consult with your professional tax advisor to determine how to properly reflect these on your return. 9

10 How to Calculate Gain or Loss for Principal Payments from NMWHFITs with CBAF Using First Trust 2057 Inflation Hedge 2 Fee Reinv (CUSIP 30273E585) as an example: 1. Take your adjusted cost basis of the security (which includes your original purchase price plus reinvestments) and multiply this by the CBAF furnished on your 1099-B. This represents your Basis of Acquisition. 2. Take the principal amount shown on your 1099-B and subtract your Basis of Acquisition to arrive at your 2012 Realized Gain or Loss for that transaction. 3. Finally, take your adjusted cost basis and subtract your Basis of Acquisition to arrive at your new adjusted cost basis for tracking purposes going forward. 4. On your IRS Form 1040 Schedule D, be sure to include the quantity of shares the principal payment was based off of. Sample calculation: $6, = original purchase price, $20.72 = how much you reinvested and your 1099-B showed a principal payment = $1, and CBAF = : 6, Adjusted Purchase Price (Includes Reinvests) [$6, $20.72] Cost Basis Allocation Factor (CBAF) 1, Basis of Acquisition 1, Principal - 1, Basis of Acquisition Realized Gain or Loss 6, Adjusted Purchase Price 1, Basis of Acquisition 5, Adjustment of Cost Basis for 2013 and Forward WIDELY HELD FIXED INCOME TRUST (WHFIT) GUIDE

11 Widely Held Mortgage Trust (WHMT) Statement A Widely Held Mortgage Trust (WHMT) represents interest in a trust holding a pool of mortgages that makes monthly payments of principal and interest. Issuers such as Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA) purchase mortgages from banks and mortgage companies, bundle them together to form a mortgage pool, and sell certificates representing interests in the pool. Every certificate holder is entitled to a pro rata share of the aggregate principal and interest payments made by the borrowers (or homeowners). LPL Financial is required to report the gross interest, expense, principal factors and market discount fraction used to determine market discount accrual and bond premium amortization. If you held a mortgage pool security, an additional WHMT statement will be postmarked by March 15, 2013, which may contain: A separate 1099-B reporting gross principal periodic payments in box 2 A separate 1099-INT reporting in: y Box 1 gross interest paid or accrued on the sale of mortgage pool securities, and y Box 5, any associated expenses Other Non-Federally Reported Items such as accrued interest on purchases Income and principal must be recognized in the year of record date, which in most cases is the month prior to the payment. Interest income Is grossed up with an offsetting expense. The expenses are a miscellaneous deduction subject to the 2% AGI limitation. All 1099-INT and 1099-B amounts on your WHMT statement will need to be added to the 1099-INT and 1099-B box totals of your 1099 Consolidated Reporting Statement. Any gross income or proceeds related to NMWHFITs will already be included in the 1099-INT and 1099-B boxes of the 1099 Consolidated tax statement. The 1099-B totals from both statements must be reflected in the Sales Price column of your Schedule D. Please review this information with your professional tax advisor. 11

12 How to Calculate Gain or Loss for WHMTs There are two options you can consider to calculate your recognized gain or loss for WHMTs. 1. Recognizing gain or loss on every principal paydown An adjusted Basis Percentage factor will be provided to you to identify the portion of the adjusted basis corresponding to the principal payment for the computation of that gain or loss on that return of capital 2. Recognizing gain or loss at final redemption Prior to redemption, you would report the principal payments listed on the 1099-B on your IRS Form 1040 Schedule D Your cost basis can equal your principal payment, showing a $0.00 gain or loss Reduce your basis by the principal paydown to arrive at your adjusted basis going forward At final redemption or disposition of the asset, you would recognize full gain or loss Mortgage Backed Securities are subject to credit, default risk, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, and interest rate risk. GNMA s are guaranteed by the U.S. government as to the timely payment of principal and interest, however this guarantee does not apply to the yield, nor does it protect against loss of principal if the bonds are sold prior to the payment of all underlying mortgages. Unit Investment Trusts (UITs) are fixed portfolios of securities with a set term. Strategies is a long-term one, therefore investors should consider their ability to pursue investing in successive trusts and tax consequences. The LPL Financial family of affiliated companies includes LPL Financial, UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC/NCUA Insured Not Bank/Credit Union Guaranteed May Lose Value Not Guaranteed by any Government Agency Not a Bank/Credit Union Deposit OP Tracking#