Who cares if they were flatshifting - effectively that is what the controller allows you to do anyway, but it negates the flywheel mass effect.
Besides, if you can do it in real life, you SHOULD be able to do it in the game.
In GT5P, you could Heel & Toe much better as the neutral effect would only happen if you hit the limiter.
Again, not very realistic, but you could work around this.
BTW, if there is a setting that anyone knows of that allows you to Heel & Toe (Brake, clutch, throttle and change gear at the same time without going into neutral!!) please let me know!!!
I think the key to heel toeing is all in the timing, I just tried it out a few minutes ago and was able to do it just fine, though I did find that you have to make sure that you don't put in more than probably 7-10% throttle as you shift, which you shouldn't have to anyway to get enough of an increase in RPM's. if you go beyond this, you will hit neutral.
Another technique would be to make sure you shift before you blip the throttle, or blip the throttle and get off it before you complete the downshift on your stick. With my slightly modded 90 RX-7, I was able to get enough RPM without going over the throttle threshold.
I'm just speaking from what I have found out in the game so far. I am by no means an expert on the subject, but just stating that I have been successful with the technique.
EDIT: On a separate note, I have found difficulty in the 1-2 upshift in all cars, seems to want more time on this shift than any other. The sensors in my shifter are fine, as I can downshift just fine, but upshifting to 2nd is a bit of a chore and can really wreck your holeshot if you screw it up, which happens all too often. I do have the patch installed for those that are curious.
EDIT 2: After thinking about the throttle threshold a bit, it makes perfect sense. They patched the game so you can't shift under full throttle, flat shifting. In a real car, that tends to destroy the transmission very quickly. Its somewhat negotiable if it actually makes a difference over proper shifting though. But, back to the point, it would make sense for PD to leave a throttle threshold such that heel toeing properly is still able to be done. Even to the uneducated it wouldn't make sense to remove such a function, so PD made a bit of a workaround, that makes you work to get it right too. So, from that, and I mean no offence to anyone, if you can't heel toe in GT5, you are simply applying more throttle than needed, which is just as bad or worse than not heel toeing at all.