How does a partnership that is not a bank source the interest on loans it holds, and does a loan secured by real property in a state give the holder nexus there?

A partnership lends money, buys loans or holds notes, and is not a bank. Two questions follow. The first concerns the sales factor, the fraction a state uses to divide a multistate business's income among the states (its numerator is the sales assigned to the state, and its denominator is sales everywhere). Which state receives the partnership's interest in that fraction: the state where the collateral sits, the borrower's state, or the lender's? The second concerns nexus, meaning enough connection to a state for it to tax the business. Does a loan secured by real property in a state where the holder has no office or employees make the holder taxable there? The answer to the first question depends on whether the partnership falls in a state's financial class, meaning the group of banks and other lenders that the state treats under its own lender rules.

Which California rule governs a partnership that is not a bank

California's special apportionment rule for lenders, Cal. Code Regs., tit. 18, section 25137-4.2, applies to "a bank or financial corporation" (subdivision (a)(1)). A financial corporation is a corporation that "predominantly deals in money or moneyed capital in substantial competition with the business of national banks." That means over 50 percent of its total gross income comes from dealings in money or moneyed capital (Cal. Rev. and Tax. Code section 23183; Cal. Code Regs., tit. 18, section 23183(b)(1)). Both texts speak of a corporation. A partnership taxed as a partnership is therefore not a financial corporation, and the bank rules of Regulation 25137-4.2 are not its rules.

The partnership is not outside the loan rules, however. Cal. Code Regs., tit. 18, section 25136-2(d)(1)(A)2 is the interest rule for a taxpayer that is not a bank or financial corporation. It uses Regulation 25137-4.2(b)(7) only to define which instruments are loans. The likely reading of the California Franchise Tax Board (FTB) is that a bank or financial corporation keeps the assignment rules of Regulation 25137-4.2 through section 25136-2(h)(3). On that reading, (h)(3)(D) disapplies only that regulation's income-producing-activity, cost-of-performance and throwback provisions (throwback is a rule that assigns sales back to the seller's state). The real property collateral rule for interest is therefore not confined to banks. It reaches any taxpayer's interest on an extension of credit "resulting from direct negotiations between the taxpayer and its customer," including a purchased loan or a participation. It does not reach securities, trading-account assets, swaps, or mortgage-backed and asset-backed securities, which fall in the separate clause for investments.

If a corporate partner is itself a bank or financial corporation, the FTB's likely reading is that the rules assigning interest in that partner's own California return are Regulation 25137-4.2(c)(3)(C) and (D), not section 25136-2. The sources reviewed do not answer whether a corporate partner's share of partnership interest counts toward its own test of predominantly dealing in money. The worked example assumes the corporate partner is not a financial corporation.

California: whether the interest is in the sales factor at all

Interest enters California gross receipts as income from "the use of property or capital" in a transaction that produces business income (Cal. Rev. and Tax. Code section 25120(f)(2)). Three screens apply before any assignment.

1. Business or nonbusiness income. A partnership whose regular business is making or buying and holding loans earns interest from the acquisition, management and disposition of loans as integral parts of that business, so the interest is business income (section 25120(a)). Interest on a few loans incidental to another business may be nonbusiness income, which is allocated to a single state and not apportioned (divided) among states. California allocates interest to itself only if the taxpayer's commercial domicile, meaning the state of its headquarters, is in California (sections 25123, 25126). No collateral or borrower test applies to allocated interest.
2. Treasury function. Interest from intangible assets held to meet the cash flow needs of the taxpayer's own business is excluded (section 25120(f)(2)(K); Cal. Code Regs., tit. 18, section 25137(c)(1)(D)). A partnership whose business is lending is not pooling cash for its own needs. The exclusion also does not apply to a taxpayer principally engaged in buying and selling such assets. An operating company's cash-management loans are the treasury case.
3. Mere holding. Under Cal. Code Regs., tit. 18, section 25137(c)(1)(C), business income from an intangible that cannot be readily tied to a specific income-producing activity "results from the mere holding of the intangible personal property." Such income is left out of the total in the denominator and is assigned to no state's numerator. The regulation's example is dividends, royalties or bond interest. A lender that originates, services and collects loans has an identifiable activity. Whether the exclusion reaches a passive buyer of whole loans is not stated, and no source reviewed applies it to loans. On one reading, which is the FTB's likely position for a fund that buys whole loans and collects through a contract servicer, the interest is left out of the denominator and out of every state's numerator. That raises the California fraction whenever any California receipt remains. On the opposite reading, section 25136-2(d)(1)(A)2 is the specific interest rule after 2015 and leaves no room for the exclusion. Both readings are open. The worked example below avoids the question because its fund originates and services its loans.

Principal repayments are never receipts (section 25120(f)(2)(A)). Interest enters the factor when the income is recognized under the Internal Revenue Code. An accrual-method lender meets that standard before cash is received. A loan on which no interest is recognized adds no receipt.

California: where the interest goes

Cal. Rev. and Tax. Code section 25136(a) provides that sales from intangible property are in California "to the extent the property is used in this state." Cal. Code Regs., tit. 18, section 25136-2(d)(1)(A)2 carries out that rule for interest in three clauses.

• Investments other than loans (bonds, securities, asset-backed securities; clause a of the regulation): California if "the investment is managed in this state." No source reviewed defines "managed," which matters for a fund managed from several offices.
• Loans secured by real property: California "to the extent the real property is located within this state." The clause mentions no other collateral, so a loan secured by equipment, inventory, receivables or a pledge of membership interests is a loan not secured by real property.
• Loans not secured by real property: California "if the borrower is located in this state."

The interest words are the same in the text for taxable years beginning before 2026 and in the amended text for taxable years beginning on or after January 1, 2026. The amendment therefore does not create an old rule and a new rule for interest. The 2026 start rests on the FTB's second notice of modifications of May 20, 2025; the final text's own applicability subsection was not read. The interest clauses were added by an amendment filed September 15, 2016 and operative January 1, 2017. They apply to taxable years beginning on or after January 1, 2015, with an election to apply them to open years back to January 1, 2012. January 1, 2013 is the date for the statute and the regulation generally, not for the interest clauses. For intangible property generally the fallbacks are reasonable approximation and then the purchaser's billing address (section 25136-2(d)(1)(B), (C)). No source reviewed approves leaving unassigned interest out of both the numerator and the denominator.

Three points stay open.

1. "Located." Section 25136-2 defines neither "located" nor a time of measurement. Regulation 25137-4.2(b)(2) defines a borrower's location for that regulation: commercial domicile for a borrower in a trade or business, and billing address otherwise. Regulation 25137-4.2(c)(3)(C)3 fixes the location at the original agreement. Whether either carries over to section 25136-2 is not stated. The FTB may read location differently. The presumption in section 25136-2(d)(1)(A) looks to the contract and to "the taxpayer's books and records kept in the normal course of business," so the FTB can read a borrower's location from the lender's loan file, such as a notice address or a guarantor's address. But the presumption speaks of "the purchaser" and the use "at the time of the sale," and whether a loan interest receipt fits those words is open. The worked example borrows commercial domicile at origination as an assumption the regulation does not supply.
2. "Secured by real property." Section 25136-2 states no test. Regulation 25137-4.2 uses a half-of-collateral-value test fixed at origination for its own rule, and New York uses fifty percent at origination.
3. "To the extent." How a loan secured by property in several states is divided is not stated. Section 25136-2(b)(10) defines "To the extent" for a customer that uses intangible property in more than one state by the portion of the benefit received. That is a proportion tied to the customer's use and not to collateral value.

A pool held for resale would be assets held in a trading account, which are not loans under Regulation 25137-4.2(b)(7). The investment clause (clause a) would then send its interest to the state where the investment is managed. The worked example states that its fund holds the pool for collection.

How other states treat the same interest

Before any state's rule for a non-financial taxpayer applies, the partnership has to be outside that state's financial class. Minnesota (Minn. Stat. section 290.01, subd. 4a(a)(9)), Florida (Fla. Stat. section 220.15(6)) and Massachusetts (G.L. c. 63, section 1) define the class by activity and not by charter. Texas decides by the same kind of test whether an entity is taxed at all (Tex. Tax Code section 171.0003). A lending partnership treated as non-financial without applying these tests reaches the wrong answer.

• Real property collateral, then borrower: New York. Interest on a loan secured by real property is a New York receipt if the property is in New York. A loan is secured by real property if real property is "fifty percent or more" of the collateral's fair market value when the loan was made (N.Y. Tax Law section 210-A.5(a)(2)(A); 20 NYCRR 4-2.5). Where the collateral is in several states, the regulation multiplies the interest by a fraction whose numerator is the fair market value of the New York real property. Interest on other loans is a New York receipt if the borrower is located in New York when the loan is made. For a business entity, the location is its commercial domicile, found by the seat of management and control and, only after due diligence, by the billing address in the taxpayer's records. For an individual, the location is the billing address. Corporate bond interest follows the issuer, and other financial instruments follow the payor. Type, collateral value and borrower location are fixed at origination and redetermined only on refinancing.
• Interest left out of a non-financial taxpayer's sales factor: Massachusetts, and Florida and Minnesota outside their financial classes.
• Massachusetts. Sales are all gross receipts "except interest, dividends" and the proceeds of securities, so those items are not sales (G.L. c. 63, section 38). 830 CMR 63.38.1(9)(a) lists interest first among the items that are not sales. A financial institution under section 1 is taxed outside section 38. Clause (e) of the definition reaches any other corporation that, "in substantial competition with financial institutions," earns more than 50 percent of its gross income from lending. Corporation there means an entity "classified for the taxable year as a corporation for federal income tax purposes," so the clause does not reach a partnership taxed as a partnership. It can reach a corporate partner whose gross income, including its distributive share (its share of the partnership's income), is mostly lending income. Whether a distributive share counts is open.
• Florida. Sales are all gross receipts "except interest" (Fla. Stat. section 220.15(5)(a)). But paragraph (5)(c) assigns a "financial organization's" interest on loans secured by liens on real or tangible personal property by the location of the property. That class is wider than California's and New York's. Subsection (6) defines the term with an inclusive list ("includes") that names a "small loan company," a "sales finance company" and an "investment company." The Florida Department of Revenue's likely position is that a commercial lending fund can be one. No source reviewed states the basis on which a lending partnership is outside the class, so this article does not say that Florida excludes a lender's interest.
• Minnesota. Interest is excluded for a non-financial taxpayer (Minn. Stat. section 290.191, subd. 5(a)(1)). But section 290.01, subd. 4a(a)(9) makes a financial institution of "any other person or business entity, other than an insurance company," that earns more than 50 percent of its gross income from activities a bank is authorized to conduct. The commissioner can exclude such an entity only on proof "by clear and convincing evidence" that it is not in substantial competition with banks. Lending is such an activity, and the clause is not limited to corporations. On the words, a fund whose income is all loan interest is therefore a financial institution unless it carries that burden. Subdivision 6 then governs: interest from loans "secured primarily by real estate or tangible personal property" is attributed to Minnesota "if the security property is located in this state," and other loans follow the borrower's residence or the application of the proceeds. How Minnesota applies subdivision 6 to a partnership was not reviewed.
• Payor's legal domicile: Texas. Interest is sourced to the payor's legal domicile. That is a corporation's or limited liability company's state of formation and a partnership's principal place of business (34 Tex. Admin. Code section 3.591(e)(12)(A), (b)(7), (b)(8)). Collateral location matters only for loan servicing receipts, and the exception for interest from a Texas bank does not apply to a commercial loan. This is a sourcing rule. Whether the receipt reaches a tax depends on whether the entity is a taxable entity (below).
• Where the income-producing activity is performed: Illinois. For taxable years ending on or after December 31, 2008, a non-dealer's interest is an Illinois receipt if the income-producing activity is performed in Illinois. Where the activity is performed in several states, the interest is an Illinois receipt if a greater proportion is performed in Illinois than in any other state, "based on performance costs." A dealer's income follows the customer instead (35 ILCS 5/304(a)(3)(C-5)(iii); 86 Ill. Adm. Code 100.3370(c)(8)(C)(i)). Borrower and collateral are not mentioned.

Collateral location is therefore irrelevant to Massachusetts for this partnership. It is also irrelevant in Florida and Minnesota unless the partnership is in the financial class. Pennsylvania, New Jersey, Tennessee and other states are not covered. The New York regulation was adopted effective December 27, 2023; the statute's own effective date was not reviewed.

Whether a loan secured by in-state real property creates nexus

No statute, regulation or ruling reviewed says that holding a mortgage, deed of trust or other lien on in-state property is nexus by itself. The California, New York and Texas statutes and regulations reviewed are silent on a lender's mortgage as such. Older department pronouncements speak to a lender's presence. All of them predate economic nexus, none binds another taxpayer, and whether each is still applied was not checked.

• New York TSB-A-88(2)C (January 26, 1988) concerned an out-of-state lender with New York borrowers and New York real property collateral. Its loans were approved, purchased and serviced outside New York, with occasional foreclosures. The opinion concluded "Accordingly, these activities do not constitute doing business in New York State," with the cautions that an agent in New York "could be found" to create doing business and that it is "limited to the facts set forth therein." TSB-A-90(25)C (December 13, 1990, on the Article 32 bank franchise tax) says that acquiring a security interest in New York property, or title by foreclosure, "is not sufficient activity, by itself, to constitute 'doing business' in New York," and that "The totality of Bank's circumstances would determine Bank's taxable status."
• North Carolina Directive CD-99-1 (February 19, 1999) treats an out-of-state mortgage lender with no place of business in the state as doing business only if it "makes more than $5,000,000 of loans secured by real property in this state" and uses employees, agents or contractors to perform services there. "Filing deeds of trust, mortgages, judgments, or liens in this state" is among the activities listed. An investor that buys loans from an unrelated third party "does not have nexus with this state based on its investment in the loans." Acquiring North Carolina real property through foreclosure creates nexus because the corporation then owns property there.
• South Carolina Revenue Ruling 08-1 (January 11, 2008) finds no nexus for passive investors that buy loans from a loan packager when "[a]n insignificant number of debtors and an insignificant amount of the property securing the loans are located in South Carolina." It states no rule for a lender holding a large amount of loans secured by in-state property. Neither the North Carolina text nor the South Carolina text is a general rule.
• Massachusetts: for a general business corporation, 830 CMR 63.39.1(3)(b)7 treats a corporation as typically taxable where it owns or uses intangible property that "generates or is otherwise a source of gross receipts within the state" through an activity that "is purposeful (e.g., a contract, license or sublicense)," and a loan secured by Massachusetts real property can be read to fit. The counter-reading is that an out-of-state lender's contract with an out-of-state borrower is a weak fit for receipts within the state when the interest is not a Massachusetts sale under section 38. The presumption in (3)(d) is separate, and interest can never meet it because interest is not in sales.

Economic nexus counts assigned receipts. Economic nexus means that a state treats a taxpayer as taxable once its in-state sales, property or payroll pass a dollar level, whether or not the taxpayer has a physical presence. California counts sales assigned under section 25136 and its regulation. A loan secured by California real property therefore produces California sales as interest accrues, whatever the lender's location (Cal. Rev. and Tax. Code section 23101(b)(2)). The 2025 thresholds are $757,070 of sales (or 25 percent of total sales, if less), $75,707 of property and $75,707 of payroll. No 2026 figures appeared on the FTB pages reviewed. New York counts receipts in the numerator of the apportionment factor. Its threshold for a corporation is $1,283,000 for tax years beginning on or after January 1, 2024 and before January 1, 2027, which is the $1,000,000 base of N.Y. Tax Law section 209(1)(b) as adjusted under section 209(1)(e). No figure is shown for tax years beginning in 2027. Texas counts gross receipts from business done in Texas of $500,000 or more, and interest from a Texas-domiciled payor is such a receipt (34 Tex. Admin. Code sections 3.591, 3.586(f)(1)). But the Texas threshold reaches a taxable entity only, and a limited partnership whose income is interest is not one (below). The Texas rule was reported amended in January 2026, and the adopted text was not reviewed. Massachusetts presumes nexus above $500,000 of Massachusetts sales, but interest is not in sales. The conclusion that collateral can push a partnership over a threshold is a matter of counting, not a holding. Interest from in-state collateral or borrowers can cross a threshold, and the statutes do not distinguish a lender from any other seller.

California's first test of doing business. Cal. Rev. and Tax. Code section 23101(a) treats a taxpayer as doing business if it is "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit." This test is separate from the thresholds, and a separate article in this library covers its case law for passive investors. No California tax statute, FTB manual section or Office of Tax Appeals opinion reviewed addresses a lender whose only contact is a loan secured by California real property. State Board of Equalization opinions and Office of Tax Appeals matters on out-of-state lenders surfaced in review but were not read. Two California texts come near, and neither decides the tax question. Cal. Corp. Code section 191(c)(7) and (d) provide two things. A foreign (out-of-state) corporation does not transact intrastate business solely by creating evidences of debt or mortgages, liens or security interests on real or personal property. A foreign lending institution does not transact intrastate business solely by acquiring loans through activities carried on from outside the state, owning and enforcing them by trustee's sale, judicial process or deed in lieu of foreclosure, or acquiring title by foreclosure and retaining it "pending the orderly sale or other disposition thereof." That is the test for qualification with the Secretary of State, not the franchise tax test. No tax authority reviewed carries it into section 23101, and a partnership is not called a foreign lending institution. Cal. Code Regs., tit. 18, section 23101 says that "The mere receipt of dividends and interest by a corporation" does not by itself constitute doing business. But it predates the 2011 thresholds, speaks of a corporation and does not mention lenders or collateral.

Public Law 86-272. Public Law 86-272 is a federal law that shields some out-of-state sellers from state income tax. Its protection, in 15 U.S.C. section 381(a), is limited to solicitation of orders for sales of tangible personal property. A loan is not such a sale. The FTB's Multistate Audit Technical Manual describes the immunity as lost by activities related to sales of real estate or intangibles.

Foreclosure. A holder that takes title to in-state real property by foreclosure, meaning the lender's taking of the property after a default, owns property there. North Carolina's directive says so expressly. Texas lists "holding, acquiring, leasing, or disposing of any property located in Texas" as a nexus activity (34 Tex. Admin. Code section 3.586(d)(15)). California counts property above the lesser of $50,000 or 25 percent of total real and tangible personal property, with a partner counting its distributive share (Cal. Rev. and Tax. Code section 23101(b)(3), (d)). For the property factor, which is the fraction of a taxpayer's property located in a state, section 25129 counts property "owned or rented and used" in the state at original cost. No regulation reviewed says whether foreclosed property held for sale is used. The pronouncements are mixed. Both New York pronouncements say that acquiring a security interest or title by foreclosure is not by itself doing business, on their facts, while North Carolina treats ownership as a contact.

The partnership and its partners

• Corporate partner unitary with the partnership. A corporate partner is unitary with the partnership when the two operate as one business. In California such a partner adds its profits-interest share of the partnership's property, payroll and sales to its own factors and combines its share of income (Cal. Code Regs., tit. 18, section 25137-1(a), (f)). Its own doing-business test counts its distributive share of the partnership's sales (Cal. Rev. and Tax. Code section 23101(d)). A partner whose share of assigned California sales exceeds the lesser of the indexed (inflation-adjusted) amount and 25 percent of its own total sales is therefore doing business, whether or not it has other California sales. A partner that is not unitary treats its share as another business, using the partnership-level apportionment. New York's aggregate method has a corporate partner include its distributive share of the partnership's business receipts (20 NYCRR 9-2.3(f)(1)).
• Corporate partner and New York nexus. A corporation that is a partner in a partnership doing business or deriving receipts in New York is taxed as the Commissioner's regulations describe (N.Y. Tax Law section 209(1)(f)). Under 20 NYCRR 1-2.8, a corporate general partner derives receipts if its own New York receipts, combined with the partnership's, total at least $1 million. Subdivision (j) adjusts that figure for inflation. A corporate general partner is therefore tested on the partnership's whole receipts and not on its share. A corporate limited partner of a partnership other than a portfolio investment partnership is tested the same way only if it is "engaged, directly or indirectly, in the participation in or the domination or control" of the partnership's business. Otherwise its New York receipts are its own plus its distributive share (subdivision (g)), on the reading the clauses support. Whether a lending fund is a portfolio investment partnership, and how the limited partner rule operates beyond the clause reviewed, are open.
• Nonresident individual partner. A partnership's business income is "apportioned at the partnership level" (Cal. Code Regs., tit. 18, section 17951-4(d)(1)). If the loan interest is nonbusiness or the lending is not a California business, Cal. Rev. and Tax. Code section 17952 applies. Under it, nonresidents' income from notes is not California-source unless the notes acquire a business situs in California. Section 17955 can also remove interest from "qualifying investment securities" for an investment partnership. Its definition lists debt securities and loan participations and not whole loans, so a portfolio of originated mortgage loans has to be tested against it and not assumed to qualify. New York sources a nonresident's intangible income only if the property is employed in a New York business (N.Y. Tax Law section 631(b)(2)). The text reviewed does not answer whether mortgage interest on New York real property is New York source income.

Filing consequences. In California, a limited partnership, limited liability company or limited liability partnership doing business under section 23101 owes the annual tax of Cal. Rev. and Tax. Code section 17935, 17941 or 17948 and files Form 565 or 568. A partnership with California-source income and no doing business must still file. In New York, the partnership files Form IT-204 if it has a New York resident partner or any income, gain, loss or deduction from New York sources. In Florida and Minnesota the duty depends first on the financial class, and no source reviewed tells whether interest alone puts a partnership in that class.

In Texas, a passive entity is not a taxable entity (Tex. Tax Code section 171.0002(b)(3)). Under section 171.0003(a), "An entity is a passive entity only if" it meets three conditions. First, it is a general or limited partnership or a trust other than a business trust. Second, at least 90 percent of its federal gross income is passive income of the listed kinds (the list opens with "dividends, interest, foreign currency exchange gain"). Third, it does not receive more than 10 percent of its federal gross income from conducting an active trade or business. Subsection (a-1) provides that the listed income may not be treated as income from an active trade or business. Interest is therefore never active income, however much staff the lender employs. A limited partnership whose federal gross income is all loan interest is a passive entity. Its Texas receipts create no franchise tax and, under 34 Tex. Admin. Code section 3.582(g)(2), no report unless it is registered or required to be registered. The $500,000 comparison reaches a taxable entity. Examples are a limited liability company lender, which section 171.0003(a)(1) does not name, and a partnership with more than 10 percent of its gross income from fees, servicing or other active income.

A worked example

Facts (invented). A limited partnership (the Fund) lends against commercial assets. Its lending staff and commercial domicile are in Connecticut. It is not a bank, takes no deposits, is not a financial corporation, has no property or employees outside Connecticut, and earns only loan interest. The example assumes that neither the Fund nor its corporate partner is in the financial class of Florida or Massachusetts. It leaves Minnesota uncomputed because the Fund may fall inside its class. The year is the Fund's 2025 taxable year. That is the latest year with California thresholds on the pages reviewed, and it falls inside New York's published period of tax years beginning in 2024 through 2026. In that year the Fund recognizes and receives interest on fifteen loans: five single loans (A to E) and a pool of ten (F). Each is a whole loan that the Fund originated or purchased and holds for collection, not for resale, and none is a security. Principal repayments and borrowers' other facts are left out. Borrowers are businesses. A borrower is "located" where its commercial domicile is, measured at origination, an assumption the regulation does not supply. A corporate partner holds 40 percent of profits, is unitary with the Fund, is not a bank or financial corporation and is a limited partner not taking part in management. Two individual nonresident partners hold 30 percent each.

• Loan A: first mortgage on a California office building (real property is all of the collateral); borrower domiciled in Nevada; interest $2,000,000.
• Loan B: first mortgage on a New York apartment building; borrower domiciled in New Jersey; interest $1,500,000.
• Loan C: first mortgage on a Texas warehouse; borrower a Texas limited liability company; interest $1,000,000.
• Loan D: pledge by the borrower's members of their membership interests in the borrower, no real property; borrower domiciled in California; interest $800,000.
• Loan E: inventory held in Arizona, no real property; borrower domiciled in New York; interest $700,000.
• Pool F: ten loans in workout, each a whole loan secured by one parcel of real property; interest recognized and received $500,000, of which $250,000 is on loans secured by California property, $150,000 Arizona and $100,000 New York.

Total interest is $6,500,000 (2,000,000 + 1,500,000 + 1,000,000 + 800,000 + 700,000 + 500,000), all business income.

California numerator (Cal. Code Regs., tit. 18, section 25136-2(d)(1)(A)2). The numerator is the interest assigned to California. Loan A is secured by California real property: $2,000,000. Loans B and C are secured by property elsewhere: $0. Loan D is not secured by real property and its borrower is in California; the equity pledge has no location: $800,000. Loan E's borrower is in New York, and the Arizona inventory plays no part: $0. Each pool loan follows its own property: $250,000. The numerator is $3,050,000 over a denominator of $6,500,000, a fraction of 46.92 percent.

New York numerator (N.Y. Tax Law section 210-A.5(a)(2)(A); 20 NYCRR 4-2.5), as it enters a corporate partner's factor. Loan A's property is in California, so the borrower is irrelevant: $0. Loan B: $1,500,000. Loan C: $0. Loan D's borrower is in California: $0. Loan E's borrower is in New York: $700,000. Pool F: $100,000. The numerator is $2,300,000 over $6,500,000, a fraction of 35.38 percent.

What the example shows.

• Neither state looks to where the collateral sits for loan E. Arizona receives nothing, and the borrower's state decides ($0 for California, $700,000 for New York). Loan D is the same, because an equity pledge has no state. For real property loans the rule changes the answer. Under a borrower-location rule, loan A would be $0 to California (Nevada borrower) and loan B $0 to New York (New Jersey borrower). Under the real property rule they are $2,000,000 and $1,500,000.
• Texas: loan C's $1,000,000 is sourced to Texas, because a Texas limited liability company payor is domiciled in Texas. The Fund is a limited partnership whose federal gross income is all interest, so it is a passive entity and not a taxable entity. The $1,000,000 creates no Texas franchise tax and, absent registration, no report.
• Massachusetts: all $6,500,000 is excluded from sales. Florida's result is the same if the Fund is outside the financial class; inside it, paragraph (5)(c) puts the interest in the factor, which the example does not compute. Illinois: the lending activity is performed in Connecticut, so the numerator is zero.
• Connecticut: the $3,450,000 not assigned to California (6,500,000 minus 3,050,000) stays in the California denominator and reaches no California numerator. No loan is assigned to Connecticut, because the investment clause (clause a), the only rule based on where an investment is "managed," reaches none of the loans. If the pool were held for resale, it would be a trading account asset, the investment clause would send its interest to Connecticut, and the California numerator would be $2,800,000, or 43.08 percent.
• The corporate partner adds 40 percent of 3,050,000, or $1,220,000, to its California sales numerator and 40 percent of 6,500,000, or $2,600,000, to its denominator. It is doing business in California under section 23101(b)(2) and (d) on that share alone. $1,220,000 exceeds $757,070, so it exceeds the lesser of that amount and 25 percent of its total sales, whatever its other sales.
• New York: the Fund's New York receipts are $2,300,000, above $1,283,000. A corporate general partner would therefore be tested on the Fund's $2,300,000 whatever its share (20 NYCRR 1-2.8(d)(1)). The example's corporate partner is a limited partner not in management. Its New York receipts are its own plus 40 percent of 2,300,000, or $920,000, which is below $1,283,000 if it has no other New York receipts. Whether the Fund is a portfolio investment partnership is open.
• California nexus for the Fund: California sales of $3,050,000 exceed the lesser of $757,070 and 25 percent of total sales ($1,625,000). The Fund is therefore doing business, owes the annual limited partnership tax of Cal. Rev. and Tax. Code section 17935 and files Form 565. The two nonresident individual partners are taxed on 46.92 percent of their distributive shares, apportioned at the partnership level. Had the interest been nonbusiness, section 25126 would have allocated it to Connecticut and section 17952 would have kept it out of California-source income.

Left out: sales of loans, fees, hedges, multiple-state collateral for a single loan, property acquired in foreclosure, Connecticut's own tax, composite or withholding rules, and states not covered.

Practice notes

Classify each instrument before assigning its interest. A loan is what Cal. Code Regs., tit. 18, section 25137-4.2(b)(7) defines it to be: an extension of credit from direct negotiation, or its purchase. Anything else is an investment, such as a security, trading asset or swap. Record at origination the collateral type and value split and the borrower's commercial domicile or billing address. Do not use collateral location for a loan secured by equipment, inventory, receivables or equity. In New York, confirm that real property is at least half of the collateral's value before using the real property rule. Record the same test for California, where section 25136-2 states none. Run each filing state's rule separately from one loan ledger. Test the financial class first in Massachusetts, Florida and Minnesota, since a non-financial taxpayer's interest leaves the factor altogether there. In Texas, test for passive entity status before measuring receipts against $500,000.

Measure economic nexus from the same assignments. Each year, compute each partner's share of California sales, property and payroll against the indexed thresholds, using the Schedule K-1 figures (the form that reports each partner's share), and file Form 565 when the partnership itself passes. Treat foreclosure as a nexus event: before a loan converts to owned real property, register or review filing duties in the property state and check the property factor. Do not rely on a state ruling about lenders without checking its date and the state's current statute; the North Carolina and South Carolina texts are decades old. G&G State Tax Group advises loan funds, lending partnerships and their partners on interest sourcing, nexus and multistate filing duties alongside its state and local tax practice.