Monsters with breath can now chose to make a regular attack instead of a breath attack. If a hellhound has a hero with taunt that they can breath on, but don't have LoS to, can the hellhound chose to not use breath and instead make a ranged attack on a different hero? As below:

___H___2

________

___X____

___1____

Key: H = hellhound, 1= hero with taunt, 2=other hero, X=rubble, _=empty space

Before this FAQ update, I would have said that the hellhound would have to use breath on hero 1, but given the morph example, it seems otherwise. The OL choses the dice and attack type for a morph attack before taunt goes off, so it would seem like the OL also choses whether to make a breath attack or ranged attack before taunt goes off.

Do you all agree with this line of reasoning?

I would tend to agree. The Morph reasoning is sound: it means that Taunt forces the choice of Target area, not the choice of attack type. However, taunt does not actually say that it determines target area: it merely says that a figure must attack another. The wording on the card implies a larger degree of control over the declared attack than the FAQ answer.

it still seems stupid that you can taunt a creature out of your LoS.

I agree as well; based on the precedent set by Morph, that seems a reasonable interpretation.

This of course assumes that the Morph/Taunt ruling survives the FAQ repair, but I don't see any reason to think it won't.