Problem...Solved! The cmdr_AIHumanSub controller in the sim file is what makes AI subs invulnerable. Changing it to cmdr_AIShip allows them to be killed. Still didn't physically sink the Midget sub though, remained floating as a dead platform.
Edit: You can add both controllers and it works. I added the AIShip before the AIHumanSub and it worked, still doesn't sink though...