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Chapter 2 — Scope

2.4 Certain Entities Exempt From Income Taxes on the Basis of Legal Form

2.4 Certain Entities Exempt From Income Taxes on the Basis of Legal Form

The legal form established for an entity may govern whether the entity is taxable or tax-exempt. Many entities are exempt from paying taxes because they qualify as either tax-exempt (e.g., not-for-profit organization) or pass-through entities (e.g., Subchapter S corporation, partnership, and certain LLCs) or because they function similarly to pass-through entities (e.g., real estate investment trusts [REITs] or regulated investment companies). To qualify for tax-exempt or pass-through treatment, such entities must meet certain conditions under the relevant tax law. According to the definition of a tax position in ASC 740-10-20, the recognition and measurement of a decision to classify an entity as tax-exempt should be evaluated under ASC 740. See Section 4.1.2.1 for additional discussion of the evaluation of an entity’s tax-exempt status.