Banking Practice Exam 2025 - Free Banking Practice Questions and Study Guide

The correct answer is that most of their income is subsidiary paid dividends, of which 80% is tax-exempt. This is a crucial aspect of the tax treatment for bank holding companies and financial holding companies. Under the Internal Revenue Code, when a corporation receives dividends from a subsidiary that it owns, a significant percentage of that income may be exempt from federal taxation. Specifically, bank holding companies can exclude 80% of the dividends received from their subsidiaries when calculating taxable income, which can significantly reduce their overall tax liability.

This structure encourages investment in banks and other financial institutions, as it allows holding companies to manage their finances effectively without incurring significant tax burdens from intercompany dividends. Thus, while the holding company itself generates income from certain activities, much of it comes from these tax-exempt dividends, leading to a lower taxable income or potentially no income tax liability at all.

The other given options do not reflect the realities of bank holding companies' operations or tax implications in the same way. For instance, they are not always chartered as non-profit corporations; they've structured their operations to leverage tax benefits instead. Similarly, stating that subsidiaries always operate at a net loss is inaccurate, as it overlooks the many profitable financial operations that subsidiaries can engage in.