This appears to be fixed with VLC 1.1.0.2~ppa1 from C-Korn VLC PPA.
Thank you to the VLC team and whoever else was involved! I can now have
DD5.1 and DTS decoding for movies that have the tracks embedded, and all
other movies fall back to stereo sound output or whatever they have
embedded.
Excellent!

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Simple Settings:
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Preferences > Audio > Output | Output module: "ALSA audio output", Use
S/PDIF when available "Tick".

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All Settings:
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Audio > | Audio Output Frequency: "48000"

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VLC doesn't output 5.1 (AC3/DD/DTS) via SPDIF (passthrough)
https://bugs.launchpad.net/bugs/567707
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