[Jan-Erik]

Just a long shot, have you tried to change "plughw 1,1" to "plughw:1,1"? Looks like you are missing ":" (colon) for pass-through.
Not sure if you need to use plughw, is hw:1,1 maybe better for going strait to the sound hardware?.

Already done that. That was just a typeo in my original post. Most audio gets passed through sound card s/pdif out to AMP fine except when I try to play 24bit/96kHz FLAC files I get "failed to initialize audio hardware" No idea why XBMC can't handle these types of audio files. Seems the only format I find XBMC can't handle at the moment.

I was wondering can XBMC actually handle 24bit 96kHz Flac files. Either 2 channel stereo or 5.1 multicahnnel?

Yes, but my filles come out as 16bit, 48kHz

Have you tried this sound autput settings?
Sound; Custom
Custom: "hdmi-remap"
Passthrough: HDMI (ALSA)

$ sudo nano ~/.asoundrc (and enter the code( (leave the file /etc/asound.conf empty)

Code:

pcm.!default {
    type plug
    slave.pcm hdmi-remap
}

pcm.hdmi-remap {
  type route
  slave.pcm hdmi
  ttable.0.0 1
  ttable.1.1 1
  ttable.2.4 1
  ttable.3.5 1
  ttable.4.2 1
  ttable.5.3 1
  ttable.6.6 1
  ttable.7.7 1
}

You can check out if AudioEngine is for you, have to compile xbmc yourself to test it out