So a full scale is flying along, using section (C) of the FAR paragraph quoted above. A clearing ahead shows a few cars and maybe a shed or covered structure. How close does the pilot have to be to identify that there are people out in the open? How long will it take him to react to climb to the 1000ft indicated on section (B) of the quoted FAR?

I think you may be splitting hair with this argument. The 400 ft for RC is directly tied to the 500 ft in section (C) of the above FAR. SIMPLE.

Rafael