Here's the scenario:
1. 2 partners 50/50 non-rental business. Partner A is active, Partner B is just the money guy & is passive investor.
2. Lots of losses in the partnership. A has deducted his share of the losses over the years, B has suspended passive loss carryover.
3. Partner A has a stroke and no longer can participate. B takes over running the partnership & now is active.
4. Not so surprisingly, with B now running the business, it is profitable.
5. Here's my question: For B, can the suspended losses be used to offset current non-passive income.
6. Normally, I would say no, however, those losses can be used if there is a sale, exchange or other disposition.
7. Does a reclassification result in an exchange?
8. I've looked all through §1.469 and cannot find a definitive answer.
9. My software, Profx, is deducting the prior year losses, but I can't find a citation.
Ideas?