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By it's default settings from Resource.cfg, you can go up to five subfolders deep, but if it's a script file (.ts4script file) you cannot go anymore than 1 subfolder deep, like The Sims 4\Mods\Folder\ is acceptable, but The Sims 4\Mods\Folder\Folder\ is not.
On further research I found out that you absolutely cannot make a folder in the Tray. That is disappointing. I wish you could go at least one deep. What a mess. I wonder what would happen if I just went in and deleted everything in the Tray folder? Would the custom sims I added to my game disappear or are they stored somewhere else and the Tray would regenerate with them in it?