***Apologies in advance if the following doesn't make sense 100%. I'm way past my bedtime....***
What is most peculiar here is that the 1400 was released in October 1996, which is a little under a year before the release of Mac OS 8 (July 1997), so by all rights, 7.6.1 should work, unless your machine is a post-July 1997-early 1998 machine, and such machines are somehow locked out of booting 7.6.1? That would make sense, given your experience so far, but we need more data to figure that out because it seems kind of far fetched. More likely is that later units shipped with 8.0 simply becasue that was the then-current version, and 7.6.1 had been discontinued, but again, we don't know without more information. For now, it's only speculation on my part.
That being said, can you confirm the manufacturing date of your 1400c/166 somehow? That would probably be a good place to start....
c