My client sold his home in California at a loss. His company reimbursed him for the loss and included it in his W2 income for 2020. He owned the house for less than 2 years so he is not eligible for home sale gain exclusion. Does the reimbursement create a gain at Fed or State level? My inclination is no as he is already being taxed on the reimbursement when it was included in his W2 income.
Nothing is contradictory. They don't Relate the way you are thinking they relate.
The Nice Employer justified giving the person a Bonus, likely because the job had something to do with the need to sell the house no matter the market.
That's the only way they relate.
"Level Up" is a gaming function, not a real life function.
You've said your client sold the home for a loss therefore there you don't need to be concerned about the home sale gain exclusion. The loss is not deductible.
The "reimbursement" is W2 income. As @qbteachmt pointed out - it's nothing more than an employer being kind with a bonus. Enter the W2 as you would any other W2.