Passive activity changes to non-passive

Technical topics regarding tax preparation.
#1
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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?
 

#2
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I've looked all through §1.469 and cannot find a definitive answer.

Try looking at the former passive activity rules.
 

#3
Pitch78  
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Look at 469(f)(1)
 

#4
Anderly  
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Form Pub 925:

Treatment of former passive activities. A former passive activity is an activity that was a passive activity in any earlier tax year, but isn’t a passive activity in the current tax year. You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. Treat any remain-ing prior year unallowed loss like you treat any other passive loss.
In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. The allocable part of your current year tax liability is that part of this year's tax liability that‘s allocable to the current year net income from the former passive activity. You figure this after you reduce your net income from the activ-ity by any prior year unallowed loss from that activity (but not below zero).
 

#5
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Thanks, guys. I guess that's why I shouldn't do research at the end of the day. :)
 


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