16:9 and 4:3 content are horizontally compressed (so that the lens expands them to the correct aspect ratio) and then cropping the top and bottom of the image with a 2.40:1 film will fill the screen.
No, you don't want to horizontally compress 16:9, you want to vertically expand 16:9. When you enable aspect ratio correction set to 2.40:1, madVR reports the target window as 1671 x 1080. This will downsize the image which is not the goal.
With a Blu-ray you have the following:
Movie Resolution: 1920 x 1080
Target Rectangle: 1920 x 1080
If you use Aspect Ratio Correction 2.40 then you get this:
Movie Resolution: 1920 x 1080
Target Rectangle: 1671 x 1080
If you use Stretch and Crop Black Bars 2.40 then you get this:
Movie Resolution: 1920 x 801
Target Rectangle: 1920 x 1080
Aspect Ratio Correction downscales the image causing a loss of pixels from the original.
Stretch and Crop stretches vertically. The original horizontal pixel count is maintained. Now the anamorphic lens stretches the image horizontally to fill the screen.
I spent all weekend with the projector and screen and can assure you that Stretch and Crop are what is required. You take the red box below and stretch it vertically to fill the screen and then you slide over the anamorphic lens to stretch it horizontally.
You start with this (actual theater):
Vertically stretch in JRiver to this:
Horizontally stretch with the anamorphic lens to this: