Subject: New Cost Basis Reporting Rules Effective For 2011 (Revised December 28, 2010) Dear Client: The Energy Improvement and Extension Act of 2008 (the Act ), enacted on October 3, 2008, expanded existing broker gross proceeds reporting rules by requiring that, subject to certain limitations, brokers report (1) a customer's adjusted basis in securities the customer sells and (2) whether gain or loss with respect to the securities is long term or short-term. The additional information will be reported on IRS From 1099-B, which prior to the Act generally reported only a customer s gross proceeds from a sale of securities. Below is a description of some of the key provisions of the cost basis reporting rules and how they will impact your Form 1099-B reporting from Goldman Sachs. IRS Circular 230 disclosure: Goldman Sachs does not provide legal, tax or accounting advice. Any statement contained in this communication (including any attachments) concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients of Goldman Sachs should obtain their own independent tax advice based on their particular circumstances. Three Year Effective Date Phase-In The new rules become effective in three phases, starting with sales of stock acquired on or after January 1, 2011. Positions acquired prior to the relevant effective dates will not be covered by the new rules and sales of such positions will not include cost basis or the long-term/short-term classification on the relevant Form 1099-B. The phase-in periods are as follows. January 1, 2011. Form 1099-B must include adjusted basis and long-term/short-term classification for sales of stock in a corporation (including common, ordinary and preferred shares) acquired for cash on or after January 1, 2011. Stock held in a dividend reinvestment plan and stock in regulated investment companies are excluded from the new reporting requirements for 2011. January 1, 2012. Starting with positions acquired for cash on or after January 1, 2012, Form 1099-B must include the adjusted basis and long-term/short-term classification for sales stock held in a dividend reinvestment plan and stock in regulated investment companies. Taxpayers may elect the average cost basis method for these positions. January 1, 2013. Form 1099-B must include adjusted basis and long-term/short-term classification for any note, bond, debenture or other evidence of indebtedness acquired for cash on or after January 1, 2013. Sales of any other commodity, contract, derivative or other financial instrument for which the Secretary of the Treasury determines basis reporting is appropriate are also subject to cost basis reporting effective for positions acquired on or after January 1, 2013.
New Form 1099-B Wash Sale Reporting Rules The new cost basis reporting rules require brokers to report a wash sale on Form 1099-B when stock of the same CUSIP is purchased and sold in the same account within a 30 day period. When a wash sale is reported on Form 1099-B, the loss is reported as a disallowed loss and the cost basis of the shares purchased within the 30 day period is adjusted accordingly. The acquisition date is also carried over to the purchased shares. The application of the wash sale rules for purposes of reporting on Form 1099-B are different from the application of the rules for wash sales as defined under 1091 of the Internal Revenue Code (the Code ). Because a wash sale is reported on Form 1099-B only when the purchase and sale transactions are executed within a 30 day period in the same account and with respect to identical securities purchases and sales in different accounts will not be reported as wash sales on Form 1099-B. You should consult your tax advisor as you may incur a wash sale that is not reported on Form 1099-B. Alternatively, you may be required to report wash sales in a manner that produces tax consequences different from those reported on Form 1099-B (for example because a purchase transaction is paired with a sale in the same account for purposes of Form 1099-B wash sale reporting, even though it should be paired with a sale transaction in a different account under 1091 of the Code). New Reporting Methodology for Short Sales Under the new rules, short sales opened on or after January 1, 2011 will now be reported when the short sale is covered rather than when the short is executed. Short sales opened prior to January 1, 2011 will not be reported when closed. Available Lot Relief/Depletion Methods The Act establishes first-in, first-out (FIFO) as the default method of lot relief/depletion in the absence of specific lot identification by clients. For clients choosing to identify a specific lot in connection with a sale (also referred to as versus specific purchase ( VSP )), VSP instructions must be provided to Goldman Sachs before settlement date of the trade or event. Clients that want to close a position by VSP using a specific lot must include the information as detailed within this package (See the form in Appendix B, which may be copied and emailed). Instructions may be communicated through any means by which trades are communicated. Goldman Sachs will also accommodate the use of various lot relief/depletion methods. Included in this package (See Appendix A) is a form that may be used for requesting a specified lot relief/depletion method. If you do not request a lot relief/depletion method your account(s) will default to the FIFO method. All positions acquired prior to January 1, 2011 will be treated as having a zero cost in Goldman Sachs s systems for purposes of lot depletion methods (relevant for methods other than LIFO and FIFO) unless the client provides historic cost basis information. If you are selecting a method other than FIFO or LIFO as defined below, please contact your GSS Client Service Representative so they can provide you with the template to upload your pre January 1, 2011 tax lots. The lot relief/depletion methods that can be elected for your account are as follows: 1. First In First Out (FIFO) earliest acquisitions are closed first; 2. Last In First Out (LIFO) latest acquisitions are closed first; 3. Highest In, First Out (HIFO) highest adjusted cost lots are closed first; 4. Lowest Cost First Out (Low Cost) lowest adjusted cost lots are closed first; or
5. Average Cost Single Category cost basis is averaged across all identical securities in the same account and the FIFO method is applied for purposes of determining holding period (available only for certain stock in regulated investment companies and stock held in a dividend reinvestment plan). 6. Least Tax - closes out those lots that are expected to generate the least amount of tax liability (or greatest amount of negative tax liability) but may not select the lots that actually generate the least amount of tax liability due to certain limitations; clients should read carefully the Least Tax depletion methodology and consult their tax advisers. Clients should consult their tax advisers regarding providing Goldman Sachs with a standing order for lot depletion, particular with respect to any potential tax consequences that may arise if a client s administrator or tax preparer utilizes a depletion methodology that varies in any way from the method applied by Goldman Sachs for purposes of Form 1099-B reporting. Least Tax Lot Depletion Methodology The Least Tax lot depletion methodology does not take into account the particular circumstances applicable to a fund or fund investor and, therefore, may not actually choose those lots that would generate the least tax liability or the lots that may produce the best tax results based on a client s particular circumstances. Accordingly, clients should read the Least Tax lot depletion methodology below and consult their tax advisers to the extent they deem necessary. The Least Tax lot depletion methodology calculates the realized gain or loss that closing each lot would generate and determines the tax liability that closing each lot would generate based on whether the lot has been held for more than one year. Tax lots held for more than one year generally are assumed to generate a tax liability equal to the amount of the gain multiplied by the highest U.S. federal income tax rate applicable to long-term capital gains for individuals (currently 15%). Tax lots held for one year or less are assumed to generate a tax liability equal to the amount of the gain multiplied by the highest U.S. federal income tax rate applicable to short-term capital gains for individuals (currently 35%). Where tax lots would generate a loss upon closing, the lots are assumed to generate a negative tax liability equal to the amount of the loss multiplied by the applicable capital gain rate for individuals based on whether the lot has been held for more than one year. Based on the above, the Least Tax lot depletion method will first close out those lots that are expected to generate the least amount of tax liability (or greatest amount of negative tax liability). The Least Tax lot depletion methodology is based upon the following assumptions: All lots are held as capital assets and subject to tax at U.S. federal income tax rates applicable to capital gains. Gains from all long positions held for more than one year are subject to tax at the maximum U.S. federal income tax rate applicable to long-term capital gains. Gains from all long positions held for one year or less are subject to tax at the maximum U.S. federal income tax rate applicable to short-term capital gains. Gains on all short positions are subject to tax at the maximum U.S. federal income tax rate applicable to short-term capital gains.
Losses on all short positions generate a negative tax liability based on the amount of the loss multiplied by the short-term capital gain rate (i.e., section 1233(d) of the Internal Revenue Code (the Code ) is not taken into account). Any losses generated by closing out a lot at a loss are not subject to any capital loss limitations. The Least Tax lot depletion methodology is subject to the following certain limitations: The potential application of any state, local or foreign taxes is not taken into account. No consideration is given to special rules under the Code that may defer or disallow losses, alter historic tax basis or treat lots held for more than one year as held for one year or less, or vice versa. For example, the methodology does not take into account the potential application of sections 263(g) (relating to short sales), 1091 (wash sales), 1092 (straddles), or 1259 (constructive sales) of the Code. The methodology only takes into account lots held in the relevant account for which the Least Tax lot depletion methodology is selected. Fixed-income investments are not adjusted to take into account market discount accruals (or higher tax rates applicable thereto) or premium amortization. In addition to the foregoing, the Least Tax lot depletion methodology relies upon basis information recorded for purposes of the broker gross proceeds reporting regulations under Treasury regulations section 1.6045-1. In certain cases, the basis information recorded for those purposes may vary from a client s actual basis in the shares due to variations between how basis is adjusted for purposes of the regulations and other rules under the Code (e.g., wash sales under section 1091). In addition, for lots acquired prior to 2011, the Least Tax lot depletion methodology relies upon basis information provided by the client and is not adjusted for corporate actions or other events that may impact tax basis. Accordingly, no assurance can be provided that the basis information used for purposes of the Least Tax lot depletion methodology is accurate. The Least Tax lot depletion methodology is available only for dispositions of physical securities. In addition, there are several types of transactions for which the Least Tax lot depletion method is unavailable. In these cases, if the portfolio s primary closing method is Least Tax, the FIFO method is used in lieu thereof. A different closing method can be selected for the specific transaction; however, a properly executed VSP instruction must be provided. Transactions for which the Least Tax method is not available include: Closing transactions for regulated futures contracts, where gain/loss is 60% long-term and 40% short term and the positions are marked to market annually; Swap novations; and Non-taxable Reorganizations, where the transactions are not taxable events. Transfer Statement Reporting The Act also requires transfer statements with respect to covered securities transferred to a broker in a non-sale transaction. This would include, for example, transfers pursuant to a gift, inheritance or VSP, which will require that you provide additional information to Goldman Sachs in order for us to deliver accurate transfer statements. When effecting a transfer, the delivering institution will transmit the basis to the receiving institution using a transfer statement. In the
case of a Gift, Inheritance or VSP there are additional details that must be included with the transfer instructions. Securities that are received without cost basis information will not be covered for purposes of basis reporting on Form 1099-B. For your convenience, we have included forms that identify the key information necessary for transfers. The gift form located in Appendix C requires the date of gift and original acquisition date of the securities. The inheritance form located in Appendix D requires the date of death and fair market value of securities. All of the forms attached in this communication can be copied and sent via email or printed on letterhead for transmission of your instructions. We have also included some Frequently Asked Questions at the end of this communication. If you have any further questions please call your investment professional.
Appendix A Depletion Method Change Request Form (on Client Letterhead): Date of Request: Effective Date: Old Depletion Method: New Depletion Method (Please select one from below) First In - First Out (FIFO) earliest acquisitions are closed first. Last In - First Out (LIFO) latest acquisitions are closed first. Highest In - First Out (HIFO) highest adjusted cost lots are closed first. Lowest Cost - First Out (Low Cost) lowest adjusted cost lots are closed first. Average Cost Single Category cost basis is averaged across all identical securities in the same account and the FIFO method is applied for purposes of determining holding period (available only for certain stock in regulated investment companies and stock held in a dividend reinvestment plan). Least Tax - closes out those lots that are expected to generate the least amount of tax liability (or greatest amount of negative tax liability) but may not select the lots that actually generate the least amount of tax liability due to certain limitations; clients should read carefully the Least Tax depletion methodology and consult their tax advisers. Account Name to apply the change to: Account Numbers to apply the change to: Authorized Signatory: Capacity of Signatory:
Appendix B VSP Request Form (on Client Letterhead): Date of Request: Actual Trade or Transfer: (on an individual allocation level) Trade Date: Settlement Date: From Account Name: From Account Number: Quantity: Security Name: Security Identifier: (CUSIP, Sedol, ISIN) To Account Name: (if a transfer) To Account Number: (if a transfer) VSP Information: Trade Date of VSP Lot: Qty of VSP Lot: Execution/Acquisition Price of VSP Lot: Are there additional VSP lots that you are closing out of? If so, please complete above information for each respect lot. Authorized Signatory: Capacity of Signatory:
Appendix C Gift Request Form (on Client Letterhead): Date of Request: Process Date: Settlement Date: From Account Name: From Account Number: Quantity: Security Name: Security Identifier: (CUSIP, Sedol, ISIN) To Account Name: To Account Number: Original Acquisition Date: Date of Gift: (may be different than process date?) Fair Market Value: (must coincide with value on Date of Gift) Is this a VSP? (if so, please complete VSP form as well) Authorized Signatory: Capacity of Signatory:
Appendix D Inheritance Request Form (on Letterhead): Date of Request: Process Date: Settlement Date: From Account Name: From Account Number: Quantity: Security Name: Security Identifier: (CUSIP, Sedol, ISIN) To Account Name: To Account Number: Date of Death: Fair Market Value: Is this a VSP? (if so, please complete VSP form as well) Authorized Signatory: Capacity of Signatory:
Appendix E Frequently Asked Questions What depletion models does Goldman support? We support seven different ways of calculating the total cost of the shares you are selling. First-In/First-Out (FIFO) This method assumes that the first shares you sell are the first you bought. Allows you to elect to sell the lot of your choice, but defaults to FIFO if a specific depletion method is not selected. Last-In/First-Out (LIFO) This method assumes that the first shares you sell are the last you bought. Allows you to elect to sell the lot of your choice, but defaults to LIFO if a specific depletion method is not selected. Highest-In/First-Out (HICO) This method assumes that the first shares you sell are those with the highest cost by tax lot. Allows you to elect to sell the lot of your choice, but defaults to HICO if a specific depletion method is not selected. Lowest-In/First-Out, Lowest Cost (LOCO) This method assumes that the first shares you sell are those with the lowest cost by tax lot. Allows you to elect to sell the lot of your choice, but defaults to LOCO if a specific depletion method is not selected. Average Cost This method uses an average basis across all identical securities in the same account and the FIFO method is applied for purposes of determining holding period (available only for certain stock in regulated investment companies and stock held in a dividend reinvestment plan). Least Tax This method closes out those lots that are expected to generate the least amount of tax liability (or greatest amount of negative tax liability) but may not select the lots that actually generate the least amount of tax liability due to certain limitations; clients should read carefully the Least Tax depletion methodology and consult their tax advisers. Versus Specific Purchase This method lets you identify which shares you are selling, giving you the most control over the amount of realized gains and losses. You can elect specific shares at the time of sale, and pair purchases and sales when the sale is executed. Where do I find my original cost basis? To determine the original purchase price of your securities, you can refer to several documents that are available to you. Documents include the monthly statement or trade confirm. Why doesn t my 1099-B match the cost basis information that I have? Several situations will result in differences between the 1099-B and your records. Securities that were purchased before the defined coverage date are not subject to basis calculation and reporting for Form 1099-B. Additionally wash sale calculations are different for purposes of Form 1099-B reporting and the taxpayer return preparation. Finally, prior to 2013 shares acquired through the exercise/assignment of an option is not adjusted for the premium paid. These differences do not change the amount of gain/loss a taxpayer must report on a tax return. Please refer to Publication 550 for reporting requirements. How do I calculate the cost basis and holding period of stock received through an inheritance? If you received stock through an inheritance, you should confirm basis via the executor and note the ability to tie basis to the estate tax return. Why is my trade being identified as a Disallowed Loss? You cannot deduct losses from sales or trades of stock or securities in a wash sale. The cost basis reporting rules require Form 1099-B to sales of securities as wash sales when they are sold within 30 days of an acquisition of securities in the same account with the identical CUSIP. Under the rules, the disallowed loss is added to the basis of the purchased securities and your holding period for the new stock or securities begins on the same day as the holding period of the stock or securities sold. The application of the wash sale rules for purposes of reporting on Form 1099-B are different from the application of the rules for wash sales as defined under 1091 of the Internal Revenue Code (the Code ). You should consult your tax advisor as you may be required to report wash sales in a manner different from what is reported on your Form 1099-B.