George,
I was not intending for him to use the ground as a neutral, only as a ground. You don't need a neutral to an isolation transformer; a new neutral is derived on the transformer secondary.
Also... you can't do it with Romex, but isn't the ground in UF encased in gray insulator? Looks to me like it meets the letter of the law!
(j/k!)
Reno,
If the existing run were 480V 1-phase, and he wanted to step it down to install a 240/120V panel, would any of us have any issues at all feeding a panel off off this circuit? An isolation transformer is no different. Shoot, carolina_elect might have to step this up at the house to 480V anyhow just for voltage drop. A 480V feeder would let him feed a 60A 240V panel from this #10 wire, too.
I see this as an economic/design choice, not a code issue. An isolation transformer is safe and acceptable to feed a panel if it's uneconomical to replace the feeder cable.