Yes, flat means 0dB. And tone defeat is called a variety of things, including Pure Direct, Source Direct and so on.
To the comment that using tone defeat makes the sound tinny, all I can suggest is that the tone defeat/bypass switching can't be very well implemented, or that its use is showing up deficiencies elsewhere in the system, which are masekd by colorations introduced with the tone controls in circuit.
Done right, tone bypass/defeat simply switches the tone controls out of circuit, thus shortening the signal path.
And re the comment about using tone controls to address deficiencies in recordings, I can only say I use the controls very rarely, and extremely sparingly.