On December 1, year 1, Ash Co. and Leigh Co. entered into a merger agreement under which Ash Co. agreed to acquire Leigh Co. in a “Type A” reorganization. The purpose of the merger was to benefit the business operations of both organizations. The merger was successful and was completed on March 15, year 2. On June 1, year 2, a lawsuit was filed against Ash Co. and its shareholders by current and former shareholders related to misrepresentations made by Leigh Co. management during the merger process. The lawsuit alleges that the Board of Directors of Ash Co. was aware of material facts regarding the merger that were not properly disclosed to Ash Co. shareholders. It alleges further that Ash Co. management made statements and claims to facilitate the merger in securities filings that were unsubstantiated or in error.

The lawsuit does not challenge the validity of the merger or the price paid for Leigh Co. stock. As a result of these facts, the post-merger price of Ash Co. shares declined substantially. To avoid further negative publicity and stem the slide in stock price, Ash Co. paid $50,000,000 to settle all of the claims made in the lawsuit. Is Ash Co. legally obligated to satisfy this liability that was due to conduct that occurred prior to the merger of Ash Co. and Leigh Co? Justify your answer. Is the payment deductible?