Final answer:
Real estate investment trusts (REITs) must distribute at least 90% of their taxable income to shareholders each year to be exempt from federal income tax, aligning with the regulation's aim to ensure investment income for shareholders.
Step-by-step explanation:
To be exempt from federal income tax, real estate investment trusts (REITs) must adhere to certain strict regulatory requirements set by the IRS/ They're designed to provide a tax-efficient way to finance real estate markets and they function somewhat differently than traditional corporations when it comes to taxes. Among those requirements, a REIT must :Distribute at least 90% of its taxable income to shareholders annually in the form of dividends.Therefore, the answer to the student's question is option a) Distribute at least 90% of taxable income to shareholders. This distribution requirement allows REITs to be mostly exempt from paying corporate taxes at the entity level, which aligns with the goal of providing a regular income stream to investors. It is important to note that while REITs are exempt at the corporate level, shareholders do pay taxes on the dividends received.