E-TRACS Treatment for US Federal Income Tax Purposes

This discussion applies to you only if you hold your E-TRACS as capital assets for tax purposes. This section does not apply to you if you are a member of a class of holders subject to special rules or a Non-United States holder.

There is no authority that directly addresses the tax treatment of your E-TRACS and thus the tax treatment of your E-TRACS is uncertain. However the E-TRACS are intended to be treated as a pre-paid forward contract with respect to the Index and the terms of the E-TRACS require you and us (in the absence of a statutory, regulatory, administrative or judicial ruling to the contrary) to treat the E-TRACS for all tax purposes in accordance with such characterization. If the E-TRACS are so treated, you should recognize capital gain or loss upon the sale, redemption or maturity of your E-TRACS in an amount equal to the difference between the amount you receive at such time and your tax basis in the E-TRACS. In general, your tax basis in your E-TRACS will be equal to the price you paid for it. Capital gain of a non-corporate United States holder is generally taxed at preferential rates where the property is held for more than one year. The deductibility of capital losses is subject to limitations. Your holding period for your E-TRACS will generally begin on the date after the issue date (i.e., the Settlement Date) for your E-TRACS and, if you hold your E-TRACS until maturity, your holding period will generally include the maturity date.

The Internal Revenue Service has recently released a notice that may affect the taxation of holders of the E-TRACS. According to the notice, the Internal Revenue Service and the Treasury Department are actively considering whether the holder of an instrument such as the E-TRACS should be required to accrue ordinary income on a current basis, and they are seeking taxpayer comments on the subject. It is not possible to determine what guidance they will ultimately issue, if any. It is possible, however, that under such guidance, holders of the E-TRACS will ultimately be required to accrue income currently and this could be applied on a retroactive basis. The Internal Revenue Service and the Treasury Department are also considering other relevant issues, including whether additional gain or loss from such instruments should be treated as ordinary or capital, whether foreign holders of such instruments should be subject to withholding tax on any deemed income accruals, and whether the special "constructive ownership rules" of Section 1260 of the Internal Revenue Code might be applied to such instruments. Holders are urged to consult their tax advisors concerning the significance, and the potential impact of the above considerations. Except to the extent otherwise required by law, UBS intends to treat your E-TRACS for United States federal income tax purposes in accordance with the treatment described above unless and until such time as the Treasury Department and Internal Revenue Service determine that some other treatment is more appropriate.

In addition, a member of the House of Representatives has recently introduced a bill that, if enacted, would require holders of the E-TRACS purchased after the bill is enacted to accrue interest income over the term of the E-TRACS despite the fact that there will be no interest payments over the term of the E-TRACS. It is not possible to predict whether this bill or a similar bill will be enacted in the future and whether any such bill would affect the tax treatment of your E-TRACS.

In addition, it is possible that (i) the E-TRACS could be treated as a debt instrument subject to the special tax rules governing contingent debt instruments, (ii) the E-TRACS could be treated as a series of forward contracts each of which mature on the next rebalancing date and/or roll date or (iii) Section 1256 of the Internal Revenue Code could apply to your E-TRACS.

Because of the absence of authority regarding the appropriate tax characterization of your E-TRACS, it is possible that the IRS could seek to characterize your E-TRACS in a manner that results in tax consequences to you that are different from those described above. For example, the IRS could possibly assert that (i) you should be treated as if you owned the underlying components of the underlying Index, (ii) you should be required to accrue interest income over the term of your E-TRACS, (iii) any gain or loss that you recognize upon the exchange or maturity of your E-TRACS should be treated as ordinary gain or loss or (iv) you should be required to include in ordinary income an amount equal to any increase in the underlying index that is attributable to ordinary income that is realized in respect of the component of the underlying index, such as interest, dividends or net-rental income. You should consult your tax adviser as to the tax consequences of such characterizations and any possible alternative characterizations of your E-TRACS for U.S. federal income tax purposes.

Investors should note that the intended tax treatment discussed above may not apply to all E-TRACS, and that the expected tax treatment of particular E-TRACS will depend on the specific nature and terms of those E-TRACS. The tax summary provided in the disclosure document for particular E-TRACS will supersede, and should be read to replace, the above discussion in respect of those E-TRACS. In evaluating any potential investment in E-TRACS, investors should refer to, and carefully consider, the tax summary in the relevant disclosure document for particular E-TRACS, and should consult their own tax advisors regarding the tax consequences to them of an investment in those E-TRACS in light of their particular circumstances as a taxpayer and the specific characteristics and terms of those E-TRACS.

No assurance can be given that future tax legislation, regulations or other guidance may not change the tax treatment of E-TRACS. Even if the tax treatment of E-TRACS is changed for any reason only on a prospective basis, that could affect our ability to issue additional E-TRACS under an existing prospectus supplement, which could affect liquidity for E-TRACS issued prior to such change.

We do not offer tax or legal advice. An investor should consult with tax and legal advisors before investing.