Forgive me, I'm new and perhaps my social standing isn't solid enough to be a part of these kinds of discussions yet, but I think the original point wasn't "Should IC racism be allowed?" but "should racism for racism's sake be allowed?"
The OP literally said that he was in jail with somebody who said nothing but the N-word. That doesn't sound like RP, that sounds like typical GTA Online edgy tween behavior. If you're trying to facilitate roleplay and all the other guy says to you is "nigger" over and over I'm sure you can understand why that's unhelpful, they're stonewalling RP.
Contrast that with a gangbanger who tosses the occasional "nigga" into his speech as he argues with the cops, or is shooting the shit with his friends, and that's obviously not a big deal.
Carpet-bombing the issue with "ban racism" is not a great solution to the problem, even if I, admittedly, would prefer it. In the same vein applying the logic of "it's just IC, man." doesn't help either because there's obviously a problem here and that argument only perpetuates it.
Basically, if you can't play a racist character without shutting down RP by chaining off racial slurs and refusing to respond to people who're trying to engage you in a more fun interaction, then you shouldn't be playing a racist character at all and there should be accountability for doing so.