You now need to prove that this drunken teenager staggering past wanted to start a physical altercation with his 26 year old brother-in-law

You're confusing necessary and sufficient conditions. "If someone were to use a racial slur against another person with the intention of provoking a physical altercation, those words could be considered fighting words," doesn't imply the inverse "If someone were to use a racial slur against another person without the intention of provoking a physical altercation, those words could not be considered fighting words."

despite taking a severe beating and not fighting back.

Another point: I wouldn't conclude from the fact that he got punched and started screaming and bleeding that he didn't mean to start a physical altercation with the phrase "watch your step dumbass n****r". His plan might have altered by being punched in the mouth.