On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009, containing the American Recovery and Reinvestment Tax Act of 2009 (2009 Tax Act), which provides for, among other things, deferral of recognition of certain cancellation of indebtedness income (CODI). That is, under tax law prior to the 2009 Tax Act, a taxpayer generally had to recognize income in the year in which it repurchased, cancelled or modified its debt, to the extent that the adjusted issue price of the old debt exceeded the amount of the new debt. Under the 2009 Tax Act, taxpayers are allowed to defer recognition of CODI until a five year period starting, for calendar year taxpayers, in 2014; deferred CODI has to be included ratably in income during that five year period. We explain the mechanics of the 2009 Tax Act, the effect on “deemed exchanges,” the consequences for deductibility of original issue discount in various circumstances and the applicable high yield debt obligation rules. We also highlight the potential pitfalls for hedge funds, especially those employing a distressed debt strategy.