I have a similar problem where by our internal domain is @123.domain.com but our Office 365 domain name is just domain.com. Users email address is @domain.com. When i try to convert 123.domain.com to a single sign-on domain using the "get-msolfederationproperty -domainname 123.domain.com" i get an error saying that domain doesnt exist out in Office 365.
How do i get around this issue, our intenal DNS domain name (123.domain.com) is different from our external DNS name (domain.com) which is setup out in Office 365.