Dear Princess-
I like that spelling list, because the words are muliple-syllable, but mostly phonetic, which means that the words aren't impossible, but will challenge young but bright minds. I remember second and third grade spelling lists (yes, I remember that crap-I not only remember what I was taught but how I was taught it) and that capitalization was part of the deal. Proper nouns got capitlized, common nouns didn't. We ALWAYS had a pretest early in the unit and the post test at the end of the unit.
I am surprised, though, that here it is nearly November, and this is the first time this matter came up for your child. Whether he had a brain fade (gee, that NEVER happens with gifted 8 year olds) or the teacher has a pedagogy (or other) problem, is probably irrelevant. I have seen many a teacher treat students unfairly, only to make it worse when a parent comes to the defense. Try to tread carefully, since it appears this teacher already has a "particular opinion" about your child. I'm a high school teacher, and when we get together with the elementary teachers for union and district stuff, it never ceases to amaze me how petty, vindictive and close-minded the elementary teachers (as a group-not individually) can get. (Yes, that is a sweeping generalization, but you should hear how they have it in for certain kids-not because of the kid but because the parent is making life miserable for them.)
I have also seen parents overreact to little things, turning very minor inconsistencies or apparent inequities into federal cases. It puts teachers in a very defensive place, causing a disruption to classroom environment (can't be helped-teachers are human). I hope this is as bad as it gets for your child, because the good news is that it's not so bad, and no college or future employer will want to know whether your child forgot capitalization rules in second grade.
Have him retake the spelling test for you, give him the perfect score he'll earn, and put that one on the fridge instead. The learning continues at home, anyway right?
Shoshana