First post here, but I've had a lot of experience with tax-exempt entities over the years.
Your council is just plain wrong, and is doing a disservice to all of the scouts and leaders involved. Of course, there is no real bad outcome for the council, since their bad advice won't affect their tax exemption or bank account balance. By having ISA's you are endangering your CO's tax exemption. The guidance from the IRS, and BSA is very clear on this.