It is possible to upgrade a codeshare flight. Whether or not AA has B class now has no relevance here. Even if B class on a BA*AA flight were eligible it would not have mattered what class it would have been re-booked into on the prime AA flight. The eligibility is determined based on the marketing carrier flight. If B on BA is eligible then it may map into Q on AA but the upgrade would have still been possible. The re-booking onto the operating carrier is a technical thing. As long as the booking class on the marketing carrier's booking class qualifies, that's all that matters. The eligibility is not determined on the basis of the booking class on the operating carrier. BA's B class maps into H on AA now that AA has withdrawn B class, however, when it was still possible to upgrade BA*AA codeshares with Avios, B class on BA*AA was still eligible regardless of the fact that it was H class on AA. Re-booking (or converting as JonNYC correctly pointed out) onto the operating carrier is simply a part of the process, which does not affect the upgrade itself at all. So, in order for the upgrade to be possible the booking class on the marketing carrier must qualify and there must be availability in the upgraded class on the operating carrier. The internal process of first re-booking onto the operating carrier is just that.

It is an internal thing that passengers should not even be aware of. All you need to know is whether the booking on the marketing carrier qualifies and whether there is availability in the upgraded booking class. And with JB routes the booking classes are usually the same (expect for B), and if there is Y class on A BA*AA flight there will be Y on the same flight under AA number. The rules do not say that there needs to be a certain commercial booking class on the operating carrier.