What belongs in an investment partnership's receipts factor: gross proceeds or net gains, interest, dividends and losses?

Which rule measures the receipts

The original uniform model counts all gross receipts not allocated; the 2014 amendment to the Multistate Tax Compact goes the other way and excludes receipts from hedging and from the sale, redemption or other disposition of cash or securities. A model binds only a state that enacts it, so each state's own text decides.

The same receipts are measured twice, and which rule governs depends on the partner. In California, a nonresident individual partner's share of business income is apportioned at the partnership level under Rev. and Tax. Code sections 25120 to 25139 (Cal. Code Regs., tit. 18, section 17951-4(d)(1)), unless the partnership and the partner's business are unitary, in which case the partner apportions (section 17951-4(d)(2)). A corporate partner follows section 25137-1: a unitary partner combines its share of the partnership's factors with its own, and for a nonunitary partner the partnership's income is apportioned by the partnership's own factors. New York applies Article 9-A to the corporate partner, which "must include its distributive share of the partnership's business receipts when computing its BAF" (20 NYCRR 9-2.3(f)); a nonresident individual partner's share is sourced under Tax Law section 631, which is outside this article. Pennsylvania's corporation tax booklet puts a partnership's gross receipts in a corporate partner's denominator "to the extent of the corporation's ownership interest." Illinois and New Jersey apply their rules on the partnership's own return. Texas taxes a non-passive partnership on its own margin (passive status is covered by a separate article).

California (Rev. and Tax. Code sections 17955 and 23040.1) and Illinois (35 ILCS 5/1501(a)(11.5)) take the question away only for a partnership whose assets are at least 90 percent qualifying investment securities. Whole loans are not on either list, so a fund that holds loans it originated, as the example does, is outside both regimes and builds its receipts factor under the general rules.

California: gross proceeds, with specific exits

California counts "the gross amounts realized" on a sale or exchange of property and on the use of property or capital, including interest and dividends, and those amounts "shall not be reduced by the cost of goods sold or the basis of property sold" (Rev. and Tax. Code section 25120(f)(2)). Every sale of a security therefore adds its full proceeds to the denominator, whether it produced a gain or a loss.

The statute lists twelve exclusions, (A) through (L), and four matter for a fund. Under (A), principal repaid or redeemed on a loan, bond or similar instrument is not a receipt, so collections of loan principal stay out while interest stays in. Under (B), "the principal amount received under a repurchase agreement or other transaction properly characterized as a loan" is out. Under (K), receipts from intangibles held in a treasury function are out (also Cal. Code Regs., tit. 18, section 25137(c)(1)(D)), but a taxpayer "principally engaged in the trade or business of purchasing and selling" such intangibles is not performing a treasury function as to the income so produced, so the exit does not reach a fund whose business is investing. Under (L), hedging receipts are out only for a hedging transaction as the statute defines it, a transaction "related to the taxpayer's trading function" for hedging "price risk of the products or commodities consumed, produced, or sold by the taxpayer." On its words, (L) does not describe a fund's interest rate swap or a currency hedge, and a currency hedge falls within the treasury definition only where a treasury function exists. Whether a fund's hedges fall within (K) or (L) is open; no pronouncement applying either was found. Contributions to capital (H) and discharge of indebtedness income (I) can also touch a fund in particular years. An item's exclusion from gross receipts does not determine whether it is business income (section 25120(f)(3)).

Section 25137 lets the taxpayer petition for, or the FTB require, a different method where the standard provisions "do not fairly represent the extent of the taxpayer's business activity in this state." On the FTB's likely position, a fund reporting a $330,000,000 denominator against $36,000,000 of income is the pattern a section 25137 review examines; this article describes no alternative method. The 2024 budget trailer bill (SB 167) added Rev. and Tax. Code section 25128.9, which excludes from the apportionment formulas a transaction or activity to the extent it generates income or loss not included in net income subject to apportionment, whatever the reason, including "exclusion, deduction, exemption, elimination, or nonrecognition" (section 25128.9(b)). The Legislature stated that the section is declaratory of existing law, cited FTB Legal Ruling 2006-1 on apportionment factors tied to exempt income, and made the section apply to taxable years beginning before, on or after the act's effective date (section 25128.9(a), (d)). A corporate partner whose share of dividends is deducted under section 24410 or 24411 should therefore expect the FTB to exclude the deducted amount.

Section 25137(c)(1)(C) of the regulation excludes from the denominator dividends and interest that result "from the mere holding" of intangibles where no income-producing activity can be identified. For a fund, holding and trading securities is the business, so the exclusion should not apply on its own terms; whether it retains any force for a single sales factor taxpayer under market sourcing is open.

On the numerator, interest assignment (section 25136-2(d)(1)(A)2, which sources secured-loan interest by the property's location) and dividend assignment (section 25136-2(d)(1)(A)1, restructured in the 2026 text with a commercial domicile fallback where the taxpayer lacks the information) are covered by separate articles. Sales of marketable securities are assigned to the location of the customer, defined "without regard to intermediaries": an individual by billing address at year end, a business entity by a commercial domicile presumed from the taxpayer's year-end books and records, and otherwise "the location of the customer shall be reasonably approximated" (section 25136-2(f), applicable to taxable years beginning on or after January 1, 2026).

New York: two methods, type by type and never below zero

New York builds investment receipts into the fraction by instrument type, and which rule applies turns on whether the corporate partner elects the fixed percentage method (N.Y. Tax Law section 210-A.5(a)(1)).

Without the election, the customer sourcing method of section 210-A.5(a)(2) governs. Dividends and net gains from stock and partnership interests "are not included in either the numerator or denominator" unless the Commissioner requires inclusion (clause (G)). Interest stays in and is sourced by type: loans secured by real property by the property's location and unsecured loans by the borrower's location (clause (A)), corporate bonds by the issuer's commercial domicile (clause (D)), and other instruments by the payor (clause (H)). The statute has further rules for government debt, federal funds, physical commodities and marked-to-market gains, which the example does not use and this article does not map. Gains come in only as "net gains (not less than zero)," computed type by type: the corporation subtracts the sum of all losses from the sum of all gains, and if the result is zero or less "no amount is included in New York receipts and everywhere receipts" (20 NYCRR 4-2.5, 4-2.7). For corporate bonds sold through a broker or exchange, 8 percent of the net gain is a New York receipt and 100 percent is in everywhere receipts.

With the election, a qualified financial instrument is one of a type in clauses (A), (B), (C), (D), (G), (H) or (I) "that has been marked to market in the taxable year by the taxpayer under section 475 or section 1256" of the Internal Revenue Code. Four statutory exceptions apply: a loan secured by real property is never one (and if only real-property loans are marked to market, no loans are), and neither is stock that is investment capital under section 208(5) or stock that generates other exempt income and is not marked to market. Marking one instrument of a clause to market makes every instrument of that clause qualified (20 NYCRR 4-2.4(a)(2)). The election "is irrevocable, applies to all qualified financial instruments, and must be made on an annual basis on the taxpayer's original, timely filed return"; under it, "eight percent of all net income (not less than zero) from qualified financial instruments is included in the numerator" and all of that net income is in the denominator (section 210-A.5(a)(1)). That net income is the sum, by type, of net gains, marked-to-market net gains, net income and receipts, each floored at zero (4-2.4(c)(1)). So for an electing partner, dividends and net gains on marked-to-market stock enter the denominator in full and the numerator at 8 percent; clause (G) governs only stock that is not a qualified financial instrument.

"A partnership cannot make the fixed percentage method election" (4-2.4(c)(5)). The election belongs to the corporate partner, which "is deemed to have marked to market" any type of instrument the partnership marks (4-2.4(a)(5)). A trader fund that marks its stock to market under IRC section 475(f) therefore hands its corporate partner an election the partnership itself cannot make.

On the Department's likely position, dividends and net gains on stock the partner identifies as investment capital under section 208(5) (requirements not covered here) leave the business income base, not only the fraction. Such stock "always will be" a nonqualified financial instrument (4-2.4(a)(3)), so clause (G) then has nothing to exclude.

Illinois and New Jersey: net gains

Illinois counts "net gains (but not less than zero)" from intangible personal property (35 ILCS 5/304(a)(3)(C-5)(iii)), and the regulation applies that floor: gross receipts from regular-course sales of intangibles are disregarded and, for sales sourced under the non-dealer rule, "only net gains" are included (86 Ill. Adm. Code 100.3380(c)(5)). A floor at zero presupposes netting, so losses offset gains and the result cannot go below zero; whether the netting unit is the class of intangible or all intangibles together is open. The statute excludes dividends, section 78 amounts and Subpart F income from both numerator and denominator (section 304(a)(3)(D)). The Department's instructions add section 965 inclusions and tested income under section 951A, which the statute as reviewed does not list.

A non-dealer's interest, net gains and other intangible income is in Illinois "if the income-producing activity of the taxpayer is performed in this State" or, where performed inside and outside, if "a greater proportion of the income-producing activity of the taxpayer is performed within this State than in any other state, based on performance costs." That is a plurality test among states, not an inside-versus-outside test, although the instructions paraphrase it as "rather than outside Illinois"; the statute's words control. For a fund managed from one office outside Illinois the numerator is zero under either reading. The instructions also describe Illinois's investment partnership regime: a partnership meeting the 90 percent tests owes no replacement tax and, from tax years ending on or after December 31, 2023, withholds for nonresident partners.

New Jersey's partnership return includes receipts from sales of capital assets not held for sale to customers "based on the net gain recognized and not on gross selling prices," but includes gross receipts where the business is buying and selling securities "for trading purposes" (Division of Taxation, Form NJ-1065 instructions). A fund must therefore classify its securities as capital assets or trading stock before it can build the New Jersey factor. The instructions do not say how dividends and interest enter or how losses net, and they exclude nonoperational activity.

Texas: each sale stands alone

Texas includes "only the net gain from the sale" of an investment or capital asset (Tex. Tax Code section 171.105(b)). The Supreme Court of Texas held in 2016 that this language does not require a taxpayer to include a net loss in the denominator (Hallmark Marketing Co., LLC v. Hegar, No. 14-1075 (Tex. Apr. 15, 2016)), and the Comptroller's rule now separates two periods. For reports originally due before January 1, 2021, "a taxable entity may add the net gains and losses" from all such sales. For later reports, "A net loss from the sale of a capital asset or investment is not included in gross receipts," net gain or loss is measured as "the amount realized from the sale less the adjusted basis," and the rule's Example 1 says "The company should not offset the net loss against the net gain" (34 Tex. Admin. Code section 3.591(e)(2)). The rule does not use the words "sale by sale"; the per-sale reading rests on subparagraphs (A) and (B) and Example 1 together.

Dividends and interest are gross receipts sourced to the payor, except that interest on federal obligations excluded from total revenue and interest exempt from federal income tax are out of both Texas and total gross receipts. Securities sold on an exchange to an unidentified payor are 8.7 percent Texas receipts (7.9 percent for reports originally due before 2021).

Pennsylvania: dividends and securities receipts are out

Pennsylvania's statute defines "sales" as all unallocated gross receipts "other than dividends received, interest on United States, state or political subdivision obligations and gross receipts heretofore or hereafter received from the sale, redemption, maturity or exchange of securities, except those held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business" (72 P.S. section 7401(3)2.(a)(1)(E)). For a fund, dividends, interest on Treasury and municipal obligations, and every disposition of a security not held for sale to customers are out of both numerator and denominator; interest on loans and corporate bonds stays in.

The Department's booklet states the rule as "Dividends and income from U.S. securities and receipts from sales of securities (unless a securities dealer)" (Form REV-1200). That understates the statute on municipal interest, on redemption and maturity receipts, and on the carve-out, which turns on securities held for sale to customers rather than on dealer status as such.

Losses, netting and the floor at zero

In California, a loss changes nothing: the proceeds are in the denominator, subject to the FTB's section 25137 power. In New York, losses offset gains only within a type and the result is floored at zero, under both methods. In Texas, each sale stands alone and a loss sale contributes nothing for reports originally due on or after January 1, 2021. In Illinois, gains and losses on intangibles net and the result is floored at zero; whether the netting runs by class or across all intangibles is open. New Jersey's instructions do not say how losses net. A receipt measured net is never a negative number in any text reviewed, and none reviewed lets a net loss reduce other receipts.

A worked example

An investment fund organized as a limited partnership holds whole loans it originated, secured by commercial real estate (about half its assets at cost), listed stock and corporate bonds. Because whole loans are not qualifying investment securities, neither state's investment partnership regime applies. The fund marks its stock and bonds to market under IRC section 475(f). Its one corporate partner is not unitary with the fund and has no receipts of its own, so its share scales numerator and denominator alike. The facts are invented. California's fraction is the fund's own, under the nonunitary rule; the New York and Pennsylvania fractions are the corporate partner's; Illinois's is the partnership's. In the year:

• (A) Interest on loans secured by real property: $20,000,000 (collateral in California $8,000,000, New York $4,000,000, other states $8,000,000).
• (B) Dividends on listed stock: $10,000,000.
• (C) Listed stock sold on exchanges: proceeds $200,000,000, basis $195,000,000; gains of $9,000,000 and losses of $4,000,000, a net gain of $5,000,000.
• (D) Corporate bonds sold through a broker: proceeds $100,000,000, basis $99,000,000; gains of $3,000,000 and losses of $2,000,000, a net gain of $1,000,000.
• (E) Principal repaid on loans: $50,000,000.

Total income is 20 + 10 + 5 + 1 = $36,000,000.

California. (A) and (B) are in, assuming the "mere holding" exclusion does not apply (open). (C) and (D) are in at gross proceeds, loss lots included. (E) is out under (f)(2)(A). The denominator is 20 + 10 + 200 + 100 = $330,000,000. The numerator from loan interest is $8,000,000, so that line's fraction is 8,000,000 / 330,000,000, or 2.42 percent. The example states the statutory result.

New York, no election (customer sourcing method). (A) is in: $20,000,000 everywhere, $4,000,000 in New York. (B) and the stock gains are out under clause (G). (D) is a net gain of 3,000,000 minus 2,000,000, or $1,000,000, all in everywhere receipts and 8 percent ($80,000) in New York receipts. (E) is not a receipt. The denominator is 20,000,000 + 1,000,000 = $21,000,000, the numerator 4,000,000 + 80,000 = $4,080,000, and the fraction 19.43 percent.

New York, election. The fund marks its stock and bonds, so the partner is deemed to have marked them and they are qualified financial instruments. The real-property loans never are, so (A) stays as above. Net income from qualified instruments is dividends of $10,000,000, stock net gains of $5,000,000 and bond net gains of $1,000,000, or $16,000,000. The denominator is 20,000,000 + 16,000,000 = $36,000,000, the numerator 4,000,000 + 8 percent of 16,000,000 (1,280,000) = $5,280,000, and the fraction 14.67 percent. The example assumes the stock is not investment capital.

Pennsylvania. (A) is in. (B) is out as dividends, and (C) and (D) are out as sales of securities not held for sale to customers. The denominator is $20,000,000; the numerator is not computed.

Illinois. (A) is in and (B) is out. (C) and (D) count net gains: 5,000,000 + 1,000,000 = $6,000,000. The denominator is $26,000,000, the same whether netting runs by class or across all intangibles, because both classes net positive.

Texas (comparison only; a non-passive entity, report originally due after January 1, 2021). (A) and (B) are gross receipts sourced to the payor. (C) and (D) count gains sale by sale and drop losses: 9,000,000 + 3,000,000 = $12,000,000. Total gross receipts are 20 + 10 + 12 = $42,000,000.

What it shows. California's $330,000,000 denominator is 15.7 times New York's $21,000,000 without the election (330 / 21), 9.2 times its $36,000,000 with it (330 / 36), and 16.5 times Pennsylvania's $20,000,000; Illinois is $26,000,000 and Texas $42,000,000. The same fund produces different receipts in each state's factor by law, not by error, and a tool that applies one state's composition everywhere misstates every other state. The example leaves out the California numerator rules for dividends and securities sales, Pennsylvania's sourcing, New Jersey and sales of partnership interests.

Practice notes

Build one denominator map per filing state, by receipt type, with the citation on each line: in or out, gross or net, the netting unit, the New York method and the numerator rule. Record gains and losses lot by lot and by instrument type, so each state's measure can be computed from one ledger. Keep loan principal and repurchase agreement principal out of the California factor and loan interest in, and tag each loan's collateral state at origination, because California and New York both source secured-loan interest by the property's location. Separate interest on federal, state and municipal obligations from other interest, because Pennsylvania excludes it and Texas excludes federal and tax-exempt interest. Document in writing whether the fund's securities are capital assets or held for trading before preparing the New Jersey allocation schedule.

Tell each corporate partner, before its return is due, which instrument types the fund marks to market under IRC section 475 or 1256, because the partnership cannot make New York's fixed percentage election, the partner is deemed to have marked what the partnership marks, and the election is annual, irrevocable and made only on an original, timely filed return. Test a fund's hedges against the California definitions of treasury function and hedging transaction before treating them as excluded, and keep the file showing why the gross measure fairly represents the fund's California activity. G&G State Tax Group provides multistate receipts factor and investment partnership apportionment reviews alongside its state and local tax practice.