You are pretty much correct in your assessment. The key to what is happening is that you are using a S/PDIF optical connection to your receiver.
S/PDIF isn't just "really only capable of 2 channels", it is
only capable of Bitstreaming two channels of PCM data. It doesn't have the bandwidth to Bitstream any more channels. Of course it can also transfer compressed AC3 and DTS 5.1, as you have observed, which I guess is Bitstreaming the original source if it is in that format. Hence 3., if MC detects anything other than AC3, DTS 5.1, or stereo PCM, it down mixes that audio to stereo, as that is the only format supported by your audio device when truly Bitstreaming channels, as you have asked it to do.
I have basically the same setup as you. A HTPC sending audio out via a motherboard based S/PDIF optical cable, to an old receiver that only support AC3 and DTS 5.1. As I want to do room correction on all my audio, and up mix it all to 5.1 channels, I don't Bitstream. I allow MC to decode all audio, apply the DSP changes I have defined, then compress the result back to AC3 in 5.1 channel format. This is set in the "Options/Audio/DSP & output format (DSP Studio)/Output Encoding" field, with a value of Dolby Digital (AC3).
In order to see what MC is doing, next time you are playing something hover your mouse over the
Audio Path icon in Standard View and MC will show you exactly what the input is, what it is doing to that input, and what the output is.