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With the Tax Reform Act of 1986, corporate tax rates fell from 46% in 1986 to 40% in 1987 and to 34% for income earned

With the Tax Reform Act of 1986, corporate tax rates fell from 46% in 1986 to 40% in 1987 and to 34% for income earned subsequent to 1987. Because the tax code allowed a 3-year carryback for net operating losses during this period, would it be tax advantageous for those firms that were profitable during 1984-1986 to generate net operating losses during 1987-1989 by: (1) selling certain assets at a loss; (2) postponing the recognition of income; and (3) accelerating certain tax-deductible expenditures? If the after-tax discount rate is 7%, how tax advantageous is this strategy? What specific actions might a firm have undertaken to generate net operating losses in 1987-1989?

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