When you buy all cash you don't get a tax benefit. There's no tax credit or other direct tax benefit as a result of buying all cash. All cash affects your overall tax situation as you will not have a mortgage interest deduction, which means that your overall taxable income is higher than if you had a mortgage and deducted the interest you paid from your taxable income. How much of a disadvantge that might be (if any) really depends on how much your mortgage interest would be if you had not purchased all cash and what your standard deduction is. The bigger the difference is between the standard deduction and what your itemized deductions would be with a mortgage interest deduction, the more an all cash purchase will have a tax implication. The benefit of making an all cash purchase is that your offer is stronger and you can close faster which may be attractive to the lender in a short sale. You'd also not have the cost of getting a loan. If you want to, you can always take out a loan later to get a mortgage interest deduction. I hope this helps answer your question.
I would highly recommend seeking the services of a tax consultant to verify to your satisfaction any sort of tax benefits/penalties.
And also remember, ..when buying a short sale...be mentally ready for the process to take a long....long....long time. I'm not kidding.
It doesn't matter how you buy the property - cash or credit - the shorted bank will 1099 you for the difference, which means you'll owe taxes on that amount. I think this might be what you are referring to...