I don't think the inspector can be held accountable.
Here's how he stated the problem.
"A white wire enters the AC breaker. White wires are only to be utilized as neutrals, not ?hot? wires. The AC wires are also undersized for this breaker. 40 amp breakers require a minimum #8 copper wire; the present wires are #10. Recommend a licensed electrician be consulted for further evaluation and/or repairs."
I think it's the licensed electrician who should be blamed if he replaced the breaker, while such replacement was not necessary. Don't you all agree?
Also, I called the AHJ and they said that they are still enforcing 98/99 code, and that white wire going into 220V breaker is ok with them since that's how they used to do it in the past.
Based on the information you all provided I think the breaker replacement was not necessary and I think a licensed electrician should know that, shouldn't he

?
what should be my next recourse?
I really appreciate responses from this great bunch here. I am an engineer and not a licensed electrician and this site has proved very uselful in enhancing my understanding of some of these things