I received notice that my C&R application was denied because of a arrest showing Domestic Assault.
You have this, in writing, on ATF letterhead, signed by an ATF agent/supervisor???
IF so, I think you need to speak to an attorney, one who handles civil rights matters.
I am not a lawyer, this is not valid legal advice, find an actual attorney for that.
That being said, I think you're being unfairly and possibly illegally denied.
No one should be denied ANY of their rights due to only an arrest record.
A disqualifying conviction is a different matter.
You have options, though some might not be quick easy, or cheap. First, take that letter from the ATF which admits they are denying you due to an ARREST record and not due to a conviction, make several copies, (pay a notary, get at least a few notarized copies) and keep the original in a safe place. You may not need them, but if you do, they will be important.
Check with an attorney. Check to see what the ATF's appeals process actually is. See if there is a time limit involved. I believe they are required to have an appeals process but it does not have to be simple, or easy. This is one of the ways that they discourage people.
TO me, this would be a matter of principle, but that's a decision you need to make for yourself. The most prudent course of action MIGHT be to wait until after the election, a different administration might have a different outlook on requiring the ATF to abide by the letter of the law.
Good luck with what ever you decide to do.