Comprehensive article addressing a recent, important ruling by the Internal Revenue Service (Technical Advice Memorandum 200418004 of 29 December 2003) about the debt versus equity distinction under US tax law. In this ruling, the IRS decided that certain subordinated loan agreements were properly characterized as equity for income tax purposes, although the holder of such instruments did not need to include in income any deemed dividends from the instruments. The law, doctrine and practice framework applicable to the debt versus equity distinction under US tax law is presented and the impact and consequences of the ruling are analysed.