custom permlink .htaccess file 404 Not Found error

If your WordPress installation is in the folder ‘sitename’, than this .htaccess should go in that folder. Not your theme folder.

From the WordPress codex: WordPress’s index.php and .htaccess files should be together in the directory indicated by the Site address (URL) setting on your General Options page (http://codex.wordpress.org/Using_Permalinks)