I'm sympathetic to Marco's blog post here, but I wonder if he's failing to interpret the two paragraphs from the documentation within the context of Instapaper's purpose.

With respect to point #1, and in the context of what Instapaper is for, the user is intending to read an article offline, and the local copy of the article was generated by the user's intent (and can, therefore, be considered user-generated even though the user is not the author of the article.)

With respect to point #2, the articles fail the "can be downloaded again" test in light of the app's purpose of making the articles available to the user when the network is not available. When the network is unavailable, the articles cannot be downloaded again. Edit: JeffDClark makes another excellent point here that the article may have originally been behind a paywall and therefore cannot be guaranteed to be re-downloadable. The same is true if the author removed the original article from their webserver.

Ergo, put them in the Documents folder. Whether this would satisfy the app reviewer is another question, but it's worth a shot to carefully explain to them how your app is not violating the letter of the law.