Hello all,
I discovered my problem. I had a separate lvm for distfiles mounted under /usr/portage/distfiles. After a more careful read of the above error message I unmounted the distfiles lvm and deleted the distfiles directory under /usr/portage.
With an empty /usr/portage directory, as it should be per the stage3 tar ball, I re-ran "emerge --sync" and everything proceeded correctly. So this problem is solved.
