The New York Supreme Court, Appellate Division, held that interest income derived from Xerox Corporation’s equipment financing agreements with governmental customers failed to qualify as “investment income” for New York Corporation Franchise Tax purposes. Xerox’s financing agreements consisted of two types: fixed purchase option leases and installment sales. Xerox argued that the interest income from these agreements was properly characterized as “investment income” because the underlying financing agreements qualified as “investment capital,” which New York law defines to include investments in “stocks, bonds and other securities.” N.Y. Tax Law § 208(5)&(6). Xerox took the position that the financing agreements constituted “debt instruments” issued by governmental entities, thereby satisfying the Department of Taxation and Finance’s own regulatory definition of “other securities.” 20 NYCRR 3-3.2(c)(2). The Appellate Court rejected this argument. Noting the absence of a statutory definition for “stocks, bonds [or] other securities,” the court applied two securities law tests to determine whether Xerox’s financing agreements, which the court described as “basic sale or lease contracts,” were of a similar nature to stocks or bonds or otherwise qualified as securities and concluded that they did not. The court also found no evidence that the financing agreements were intended to be considered debt instruments and that such agreements qualified as debts “issued by” a governmental entity under the Department’s regulation, or that such agreements should be considered debts of governmental customers in light of state restrictions on government assumption of debt. The court held that the financing agreements were business capital whether the purchaser was a governmental or private entity. Xerox Corporation v. N.Y. Tax App. Trib., 2013 WL 5745853 (N.Y.A.D. 3 Dept., Oct. 24, 2013).