Prohibited Transaction?

I'm having a brain cramp here.  Joe owns 100% of company A, which sponsors a DB plan - he is the only employee.  Joe also owns 79% of company B and the other 21% is held by Bob.  Joe is the only employee of company B.  A and B are not part of either a controlled group or an ASG.  Is Bob permitted to borrow from the DB plan sponsored by company A?

Generally, a loan from a DB plan treated as an investment of trust assets and is subject to all of the due diligence needed to assure that the loan is an appropriate investment to be held by a qualified plan.  Company A fiduciaries would bear the responsibility of making an assessment that this is an arms-length transaction unaffected by Bob's status as a co-owner of business B, that the loan itself is a sound investment.

It doesn't sound like Bob is a participant in the DB, so one would expect that a loan to Bob would be backed by sufficient collateral to cover the loan in the event of default.  Unlike a participant loan from a defined contribution plan, there is no vested account balance available to support the loan.

If Bob has the collateral to back up loan, it begs the question why the Bob cannot get a loan from sources unrelated to the plan.  A loan from an unrelated source would keep the DB plan cleanly out of equation.

To add a twist to a proverbial saying, neither lender borrower be; for loan oft loses both itself and co-owner.

I'd also add that you may want to look closely at the fiduciary self-dealing PTs (in addition to the extension of credit). 

If the DB plan is making a loan to Bob so that Bob can invest the borrowed proceeds into something Joe otherwise couldn't afford, I think you have a problem. For example, Joe wants to buy a piece of real estate for $500,000. He has $400,000. Bob agrees to borrow the last $100,000 from the DB plan to co-invest with Joe, allowing Joe to buy the property. Even if the loan is not directly prohibited under 4975(c)(1)(B), because Bob is not a disqualified person, it could still be fiduciary self-dealing on Joe's part under 4975(c)(1)(E).  

Agreeing with Paul and echoing a comment I made on another post earlier, just because maybe you can doesn't mean you should.

And EBEC brings up a great point and potential gotcha as sometimes a PT can result through indirect avenues.

If Company B is unincorporated, then Bob is a 10% partner or joint venturer of an owner of Company A.  That makes Bob a disqualified person under Code section 4975(e)(2)(I), and the transaction is a PT, I believe.  (And, I think, as EBECatty said, even if it wasn't a PT on its face, Joe would have a hard time arguing to the IRS that this was not a self-dealing transaction, as his likely motivation to make the loan is his relationship with Bob.)