Notes to Financial Statements
1 Significant Accounting Policies
Eaton Vance Tax-Managed Diversified Equity Income Fund
(the Fund) is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a diversified, closed-end management investment company. The Funds primary investment objective is to provide
current income and gains, with a secondary objective of capital appreciation.
The following is a summary of significant accounting policies of the Fund.
The policies are in conformity with accounting principles generally accepted in the United States of America.
A Investment Valuation
Equity securities (including common shares of closed-end investment companies) listed on a U.S.
securities exchange generally are valued at the last sale or closing price on the day of valuation or, if no sales took place on such date, at the mean between the closing bid and asked prices therefore on the exchange where such securities are
principally traded. Equity securities listed on the NASDAQ Global or Global Select Market generally are valued at the NASDAQ official closing price. Unlisted or listed securities for which closing sales prices or closing quotations are not available
are valued at the mean between the latest available bid and asked prices or, in the case of preferred equity securities that are not listed or traded in the over-the-counter market, by a third party pricing service that will use various techniques
that consider factors including, but not limited to, prices or yields of securities with similar characteristics, benchmark yields, broker/dealer quotes, quotes of underlying common stock, issuer spreads, as well as industry and economic events.
Exchange-traded options are valued at the mean between the bid and asked prices at valuation time as reported by the Options Price Reporting Authority for U.S. listed options or by the relevant exchange or board of trade for non-U.S. listed options.
Over-the-counter options are valued by a third party pricing service using techniques that consider factors including the value of the underlying instrument, the volatility of the underlying instrument and the period of time until option expiration.
Short-term obligations purchased with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Foreign securities and currencies are valued in U.S. dollars, based on foreign currency
exchange rate quotations supplied by a third party pricing service. The pricing service uses a proprietary model to determine the exchange rate. Inputs to the model include reported trades and implied bid/ask spreads. The daily valuation of
exchange-traded foreign securities generally is determined as of the close of trading on the principal exchange on which such securities trade. Events occurring after the close of trading on foreign exchanges may result in adjustments to the
valuation of foreign securities to more accurately reflect their fair value as of the close of regular trading on the New York Stock Exchange. When valuing foreign equity securities that meet certain criteria, the Funds Trustees have approved
the use of a fair value service that values such securities to reflect market trading that occurs after the close of the applicable foreign markets of comparable securities or other instruments that have a strong correlation to the fair-valued
securities.
Investments for which valuations or market quotations are not readily available or are deemed unreliable are valued at fair value using
methods determined in good faith by or at the direction of the Trustees of the Fund in a manner that fairly reflects the securitys value, or the amount that the Fund might reasonably expect to receive for the security upon its current sale in
the ordinary course. Each such determination is based on a consideration of relevant factors, which are likely to vary from one pricing context to another. These factors may include, but are not limited to, the type of security, the existence of any
contractual restrictions on the securitys disposition, the price and extent of public trading in similar securities of the issuer or of comparable companies or entities, quotations or relevant information obtained from broker/dealers or other
market participants, information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities), an analysis of the companys or entitys financial condition, and an evaluation of the forces that
influence the issuer and the market(s) in which the security is purchased and sold.
The Fund may invest in Eaton Vance Cash Reserves Fund, LLC (Cash
Reserves Fund), an affiliated investment company managed by Eaton Vance Management (EVM). Cash Reserves Fund generally values its investment securities utilizing the amortized cost valuation technique in accordance with Rule 2a-7 under the 1940 Act.
This technique involves initially valuing a portfolio security at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. If amortized cost is determined not to approximate fair value, Cash Reserves Fund may
value its investment securities based on available market quotations provided by a third party pricing service.
B Investment Transactions
Investment transactions for financial statement purposes are accounted for on a trade date basis.
Realized gains and losses on investments sold are determined on the basis of identified cost.
C Income
Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. However, if the
ex-dividend date has passed, certain dividends from foreign securities are recorded as the Fund is informed of the ex-dividend date. Withholding taxes on foreign dividends and capital gains have been provided for in accordance with the Funds
understanding of the applicable countries tax rules and rates. Interest income is recorded on the basis of interest accrued, adjusted for amortization of premium or accretion of discount.
D Federal Taxes
The
Funds policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute to shareholders each year substantially all of its net investment income, and all or substantially all of
its net realized capital gains. Accordingly, no provision for federal income or excise tax is necessary.
At October 31, 2012, the Fund, for federal
income tax purposes, had a capital loss carryforward of $445,775,309 and current year deferred capital losses of $2,409,834 which will reduce its taxable income arising from future net realized gains on investment transactions, if any, to the extent
permitted by the Internal Revenue Code, and thus will reduce the amount of distributions to shareholders, which would otherwise be necessary to relieve the Fund of any liability for federal income or excise tax. The capital loss carryforward will
expire on October 31, 2015 ($98,912,884), October 31, 2017 ($293,314,901) and October 31, 2018 ($53,547,524). The current year deferred capital losses are treated as arising on the first day of the Funds next taxable year and
are treated as realized prior to the utilization of the capital loss carryforward.
Eaton Vance
Tax-Managed Diversified Equity Income Fund
October 31, 2012
Notes to Financial Statements continued
As of October 31, 2012, the Fund had no uncertain tax positions that would require financial statement recognition, de-recognition, or disclosure. The Fund files a U.S. federal income tax return annually after
its fiscal year-end, which is subject to examination by the Internal Revenue Service for a period of three years from the date of filing.
E Expense Reduction
State Street Bank and Trust Company (SSBT) serves as custodian of the Fund. Pursuant to the custodian
agreement, SSBT receives a fee reduced by credits, which are determined based on the average daily cash balance the Fund maintains with SSBT. All credit balances, if any, used to reduce the Funds custodian fees are reported as a reduction of
expenses in the Statement of Operations.
F Foreign Currency
Translation
Investment valuations, other assets, and liabilities initially expressed in foreign currencies are translated each business day into U.S. dollars based upon current exchange
rates. Purchases and sales of foreign investment securities and income and expenses denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates in effect on the respective dates of such transactions.
Recognized gains or losses on investment transactions attributable to changes in foreign currency exchange rates are recorded for financial statement purposes as net realized gains and losses on investments. That portion of unrealized gains and
losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
G Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
H Indemnifications
Under the
Funds organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Fund. Under Massachusetts law, if certain conditions prevail,
shareholders of a Massachusetts business trust (such as the Fund) could be deemed to have personal liability for the obligations of the Fund. However, the Funds Declaration of Trust contains an express disclaimer of liability on the part of
Fund shareholders and the By-laws provide that the Fund shall assume the defense on behalf of any Fund shareholders. Moreover, the By-laws also provide for indemnification out of Fund property of any shareholder held personally liable solely by
reason of being or having been a shareholder for all loss or expense arising from such liability. Additionally, in the normal course of business, the Fund enters into agreements with service providers that may contain indemnification clauses. The
Funds maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred.
I Written Options
Upon the writing of a call or a put option, the premium
received by the Fund is included in the Statement of Assets and Liabilities as a liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written, in accordance with the Funds
policies on investment valuations discussed above. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the
proceeds or amount paid on the transaction to determine the realized gain or loss. When an index option is exercised, the Fund is required to deliver an amount of cash determined by the excess of the strike price of the option over the value of the
index (in the case of a put) or the excess of the value of the index over the strike price of the option (in the case of a call) at contract termination. If a put option on a security is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as a writer of an option, may have no control over whether the underlying securities or other assets may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change
in the price of the securities or other assets underlying the written option. The Fund may also bear the risk of not being able to enter into a closing transaction if a liquid secondary market does not exist.
2 Distributions to Shareholders
Subject
to its Managed Distribution Plan, the Fund makes quarterly distributions (monthly distributions beginning in January 2013) from its cash available for distribution, which consists of the Funds dividends and interest income after payment of
Fund expenses, net option premiums and net realized and unrealized gains on stock investments. The Fund intends to distribute all or substantially all of its net realized capital gains (reduced by available capital loss carryforwards from prior
years, if any). Distributions are recorded on the ex-dividend date. The Fund distinguishes between distributions on a tax basis and a financial reporting basis. Accounting principles generally accepted in the United States of America require that
only distributions in excess of tax basis earnings and profits be reported in the financial statements as a return of capital. Permanent differences between book and tax accounting relating to distributions are reclassified to paid-in capital. For
tax purposes, distributions from short-term capital gains are considered to be from ordinary income. Distributions in any year may include a substantial return of capital component.
The tax character of distributions declared for the years ended October 31, 2012 and October 31, 2011 was as follows:
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Year Ended October 31,
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2012
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2011
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Distributions declared from:
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Ordinary income
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$
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20,879,044
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$
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18,540,049
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Tax return of capital
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$
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144,553,527
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$
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175,734,205
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Eaton Vance
Tax-Managed Diversified Equity Income Fund
October 31, 2012
Notes to Financial Statements continued
During the year ended October 31, 2012, accumulated net realized loss was decreased by $139,050 and accumulated undistributed net investment income was decreased by $139,050 due to differences between book and
tax accounting, primarily for foreign currency gain (loss) and distributions from real estate investment trusts (REITs). These reclassifications had no effect on the net assets or net asset value per share of the Fund.
As of October 31, 2012, the components of distributable earnings (accumulated losses) and unrealized appreciation (depreciation) on a tax basis were as
follows:
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Capital loss carryforward and deferred capital losses
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$
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(448,185,143
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)
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Net unrealized appreciation
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$
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282,796,080
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The differences between components of distributable earnings (accumulated losses) on a tax basis and the amounts reflected in the
Statement of Assets and Liabilities are primarily due to wash sales, written options contracts and distributions from REITs.
3 Investment Adviser Fee and Other Transactions with Affiliates
The investment adviser fee is earned by EVM as compensation for management and investment advisory services rendered to the Fund. Pursuant to the investment advisory agreement and subsequent fee reduction
agreement, the fee is computed at an annual rate of 1.00% of the Funds average daily gross assets up to and including $1.5 billion, 0.98% over $1.5 billion up to and including $3 billion and at reduced rates on daily gross assets over $3
billion, and is payable monthly. Gross assets as referred to herein represent net assets plus obligations attributable to investment leverage, if any. The fee reduction cannot be terminated without the consent of the Trustees and shareholders. The
Fund invests its cash in Cash Reserves Fund. EVM does not currently receive a fee for advisory services provided to Cash Reserves Fund. For the year ended October 31, 2012, the Funds investment adviser fee amounted to $16,499,257 or 1.00%
of the Funds average daily gross assets. EVM also serves as administrator of the Fund, but receives no compensation.
Trustees and officers of the
Fund who are members of EVMs organization receive remuneration for their services to the Fund out of the investment adviser fee. Trustees of the Fund who are not affiliated with EVM may elect to defer receipt of all or a percentage of their
annual fees in accordance with the terms of the Trustees Deferred Compensation Plan. For the year ended October 31, 2012, no significant amounts have been deferred. Certain officers and Trustees of the Fund are officers of EVM.
4 Purchases and Sales of Investments
Purchases and sales of investments, other than short-term obligations, aggregated $480,012,677 and $594,532,382, respectively, for the year ended October 31,
2012.
5 Common Shares of Beneficial Interest
The Fund may issue common shares pursuant to its dividend reinvestment plan. There were no common shares issued by the Fund for the years ended October 31, 2012 and October 31, 2011.
On August 6, 2012, the Board of Trustees of the Fund authorized the repurchase by the Fund of up to 10% of its then currently outstanding common shares in
open-market transactions at a discount to net asset value (NAV). During the year ended October 31, 2012, the Fund repurchased 1,502,500 of its common shares under the share repurchase program at a cost, including brokerage commissions, of
$14,450,283 and an average price of $9.62 per share. The weighted average discount per share to NAV on these repurchases amounted to 13.68%.
6 Federal Income Tax Basis of Investments
The cost and unrealized appreciation
(depreciation) of investments of the Fund at October 31, 2012, as determined on a federal income tax basis, were as follows:
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Aggregate cost
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$
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1,367,550,220
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Gross unrealized appreciation
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$
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319,643,585
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Gross unrealized depreciation
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(37,048,127
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)
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Net unrealized appreciation
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$
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282,595,458
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Eaton Vance
Tax-Managed Diversified Equity Income Fund
October 31, 2012
Notes to Financial Statements continued
7 Financial Instruments
The Fund may trade in financial instruments with off-balance sheet
risk in the normal course of its investing activities. These financial instruments may include written options and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. The notional
or contractual amounts of these instruments represent the investment the Fund has in particular classes of financial instruments and do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with
these instruments is meaningful only when all related and offsetting transactions are considered. A summary of written call options at October 31, 2012 is included in the Portfolio of Investments.
Written options activity for the year ended October 31, 2012 was as follows:
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Number of
Contracts
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Premiums
Received
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Outstanding, beginning of year
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6,345
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$
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23,069,562
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Options written
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72,185
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153,081,562
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Options terminated in closing purchase transactions
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(69,725
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)
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(164,974,776
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)
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Options expired
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(2,905
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)
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(5,035,775
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)
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Outstanding, end of year
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5,900
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$
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6,140,573
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All of the assets of the Fund are subject to segregation to satisfy the requirements of the escrow agent. At October 31, 2012,
the Fund had sufficient cash and/or securities to cover commitments under these contracts.
The Fund is subject to equity price risk in the normal course
of pursuing its investment objectives. The Fund writes index call options above the current value of the index to generate premium income. In writing index call options, the Fund in effect, sells potential appreciation in the value of the applicable
index above the exercise price in exchange for the option premium received. The Fund retains the risk of loss, minus the premium received, should the price of the underlying index decline. The Fund is not subject to counterparty credit risk with
respect to its written options as the Fund, not the counterparty, is obligated to perform under such derivatives.
The fair value of open derivative
instruments (not considered to be hedging instruments for accounting disclosure purposes) and whose primary underlying risk exposure is equity price risk at October 31, 2012 was as follows:
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Fair Value
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Derivative
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Asset Derivative
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Liability Derivative
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Written options
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$
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$
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(1,951,050
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)
(1)
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(1)
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Statement of Assets and Liabilities
location: Written options outstanding, at value.
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The effect of derivative instruments (not considered to be hedging instruments for
accounting disclosure purposes) on the Statement of Operations and whose primary underlying risk exposure is equity price risk for the year ended October 31, 2012 was as follows:
Report of Independent Registered Public Accounting Firm
To the Trustees and Shareholders of Eaton Vance Tax-Managed Diversified Equity Income Fund:
We have audited the
accompanying statement of assets and liabilities of Eaton Vance Tax-Managed Diversified Equity Income Fund (the Fund), including the portfolio of investments, as of October 31, 2012, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are
the responsibility of the Funds management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2012, by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Eaton Vance Tax-Managed Diversified Equity Income Fund as of
October 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in
conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 17, 2012
Eaton Vance
Tax-Managed Diversified Equity Income Fund
October 31, 2012
Federal Tax Information (Unaudited)
The Form 1099-DIV you receive in January 2013 will show the tax status of all distributions paid to your account in calendar year 2012. Shareholders are advised to consult their own tax adviser with respect to the
tax consequences of their investment in the Fund. As required by the Internal Revenue Code and/or regulations, shareholders must be notified regarding the status of qualified dividend income for individuals and the dividends received deduction for
corporations.
Qualified Dividend Income.
The Fund designates approximately $39,433,100, or up to the maximum amount of such dividends
allowable pursuant to the Internal Revenue Code, as qualified dividend income eligible for the reduced tax rate of 15%.
Dividends Received
Deduction.
Corporate shareholders are generally entitled to take the dividends received deduction on the portion of the Funds dividend distribution that qualifies under tax law. For the Funds fiscal 2012 ordinary income
dividends, 100% qualifies for the corporate dividends received deduction.
Eaton Vance
Tax-Managed Diversified Equity Income Fund
October 31, 2012