Pre-Closing Special Dividends: Distributions Or Sales Proceeds?

A recent pair of decisions by the California Office of Tax Appeals examined the tax treatment of special dividends paid in connection with the acquisition of a corporate target.

Private company acquisitions are frequently priced on a "cash-free, debt-free" basis. A target company that holds excess amounts of cash shortly before such a sale may be indifferent on a pre-tax basis between receiving a pre-closing distribution and a reduced purchase price and leaving the cash in the company and receiving a corresponding increase in sales proceeds. From an income tax perspective, however, the two are generally treated differently, and in some cases may result in a significant bottom-line difference for different taxpayers.