I don't think he's asking if the DAC will work....I believe he's asking if he turns of the DD, will it also effect the audio coming from the HDMI.  

I would assume that it would.  But that's an assumption.  The ATV has ON/OFF/AUTO for the Dolby Digital and  16 bit and AUTO for Audio Output. 


For what it's worth....I did this exact thing yesterday using a Binary DAC connected to an AppleTV, going into an analog source on the Bose Lifestyle 18.  

I used it for Airplay, iTUNES, iTUNES radio, and I previewed the Lone Ranger and Elysium.    

Everything worked.  

Were the movies  in DD?  Don't know, my job was to get it to make sound.  

I left the Audio Output and DD on AUTO.