Sure. iPhoto prefs:
Please note - correction - the previous Photoshop prefs panel for Camera Raw was incorrect. The JPEG handling has to be set to allow opening JPEGS. This gives credence to your theory that it is opening a JPEG. All I know is that it's working and I am able to make good adjustments in ACR and then Photoshop saves it back to the right place in iPhoto, all is good!
Here is the revised PS prefs pane:
Great - be aware that lots of people read these for information and therefore it is important that they understand what is actually happening so they make informed decisions
And thanks so much for allowing that "This gives credence to your theory that it is opening a JPEG" - as previously stated it is - and anyone wanting to use a RAW work flow needs to understand that they have to save to the desktop form PS and import to iPhoto giving them both the original RAW and and new original for the JPEG that PS has saved and is imported to iPhoto
Generally passing a JPEG to SP and eiting it works just fine - if it does not then you have the more complicated work flow and a newely created JPEG of the previous RAW image in iPhoto (two copies - the original RAW with its various versions and the new JPEG with its various versions
Here's the thing:
If you send a Raw to Photoshop and it tries to save back to the iPhoto Library it will save back to the folder that the file came from. It just does not know about any other folder. So, if you uncheck the 'Use Raws with External Editor' then the Jpeg Preview goes to Photoshop and it tries to save the file... back into the folder it came from, as Photoshop knows of no other folder.
And the key factor here is that it's iPhoto sending the file. PS has no knowledge of anything apart from what iPhoto sends it.
So, either there something very unusual going on on the OPs machine, or, simply, iPhoto is respecting the choice not to send the Raw and is sending a Jpeg instead. Everything points to that. It describes the Jpeg workflow exactly.
Obviously this is important to the OP as there is, I believe, a significant risk that’s/he is editing jpeg previews when hoping to process Raws.