The passport gender change process can indeed be very frustrating; it's clear that most of the employees at State and USPS aren't familiar with the regulations. In my case, I originally filled out a DS-11 and prepared to submit it in person, yet when I called the local post office to make the appointment they insisted I could use a DS-82, which I dutifully filled out and sent in... only to get that same rejection letter weeks later, telling me to use the DS-11 and apply in person. (This wasn't what I wanted to hear a month and a half before my flight for surgery.)
And after I returned to the U.S. newly bevaginated, I sent them a DS-82 with a letter meeting all the criteria to get my full 10-year passport, only to receive a request for that same letter
again in the mail a few weeks later... once the real passport agency called me back (you have to request a call from them from the NPC), they couldn't tell me what was wrong with the letter I sent in, and they called me back a half hour later to inform me everything was OK and I'd be receiving my new passport in a few days.
State really needs to make their guidance clearer and get it out to all their and USPS's passport workers.
(But when I went to get my marker changed at Social Security, the worker there went against SSA's guidance and accepted my 2-year passport, so inconsistency can sometimes have a bright side.
)