Partnership sale - debt basis used to unsuspend PY losses
This is a more complex tax question and I don't seem to find anything written in stone within the IRC. Seeking additional guidance from another CPA who might have prior experience.
I am working on a situation tax analysis for a client who is looking to sale their partnership. The partnership is a 90/10 ownership. The 90% is a foreign Partnership and the 10% is a US citizen.
Basis in the company is about ($7M) for the 90% owner and ($750K) for the 10% owner. The 10% owner has utilized all losses since the business began in 2016, while the 90% owner has not utilized them as the Partnership is the passive investor. There around around $7M of suspended losses on the 90% partner, and he also has around $11M of debt on the books he has loaned the company over the years.
My main question is:
If the company sales and the 90% partner is able to utilize all of the suspended ordinary losses against the ordinary income from depreciation recapture, he would have to use the debt basis...which would bring his capital account back to 0. At this point, even with the business shutting down, would that debt basis used to unsuspend the losses basically be required to be taxed at LTCG rates?
Thanks for any additional follow-up, it is much appreciated.