Want to know what I would do? No? Okay then.
Well, I'll tell you anyway. Don't pay to ship the entire engine back. The block is toast, and doesn't have any value anyway. If it has any billet parts, pull those off. Put whatever fits into a medium or large flat rate USPS box and ship it back.
Now, who should pay for it?
If the buyer made a mistake or didn't notice something that was disclosed up front, then he should pay for it.
If the seller made a mistake and sold something that wasn't what he said it was, or if he mislead (either intentionally or unintentionally) the buyer in any way, the seller should pay for it.
In this scenario, the seller screwed up. I know it sucks, but that's business. Be a man and own your mistake. Cut your losses and move on, or pay to have the parts/engine shipped back. It's really not that hard.
EDIT: If you read ALL of the pages, you'll see that my post is redundant since they've already resolved it.