I was told today that the sideways move I interviewed for was given to the interviewers good friend. I was told that I would be part of the team for 1 1/2 hours at the end of the day. In the meeting as a group, the lead (who's friend was given the job I interviewed for) asked me to turn over my entire written library I authored the last year to the new team (that I was passed over) because my "talent was communication". I'm shocked. I contributed in good faith but I'm not sure what to do. Basically, it would be like me teaching the person who got the job how to speak like me in any situation with our customer. Please, anyone tell me how to handle this with diplomacy. I am so confused. Any feedback would be so appreciated.

You do need tact and diplomacy, but you also need to be your best assertive self. I don't think you should hand over your work when it's this blatantly being used without you getting a raise and promotion.
BUT -
It's something of a gray area, because if the work you did was specifically assigned to you as a task, then the results of that work belong to your employer, and we all know that workplaces are unfair.
That being said, I know I couldn't continue to work there.
You risk being let go, but I see no choice other than to say that you need to think til Monday about the way you were passed over.
Don't say anything until you have a well-formed little speech in mind. Take the library of work home with you. Then go in and calmly say that you deserve a raise and a promotion for your work, that it's been a year, and that you will wait til Friday for their decision.
Prepare to quit. Again, I wouldn't want to work there.
If you quit, you can't keep the work you wrote.

I agree with joypulv. Tough situation... and you have to carefully think before you say anything or do anything. I will also add. Don't spout off you are quitting or are going to quit. You box yourself in and find yourself in an ever worse situation. Find another job before you even hint you are looking. You may find you need this one for now. If you quit you don't qualify for severance OR unemployment benefits. If they fire you for cause..you may find you can't collect benefits either.

You make sure your name is on it, and turn over a copy. No need to say anything, not even that you have the originals. Your team knows that you wrote it anyway since you have used it for a year already.

It's a bummer to be a victim of office politics or cronyism, but play it cool and keep your eyes open for other opportunities.