They have a huge thread on this at Prince.org. Another opinion expressed there, which makes sense to me, is that Richards was simply heckled to the point where he was deeply hurt and embarrassed and wanted to hurt the hecklers back and they happened to be black. Their point was that maybe he wasn't being racist but was intending to be as hurtful as possible and to dig in that soft spot, Richards went with what was easiest - the "n" word and the stringing them upside down crap.
Not to dismiss/justify/allow the comments. What he said was wrong and hurtful and uncalled for. But is he racist? Or was he backed into a corner and lashed out inappropriatley? The same could be applied to other things besides race. If the hecklers were gay, he would have called them faggots. If the hecklers were women, he would have called them whores. If the hecklers were missing a leg he would have called them one-legged freak shows or whatnot.
This isn't my opinion. Like I said, I read a big thread about it and the point made sense to me, but I never watched Seinfeld and don't really know this character, Richards.
Having said all that, I hate the "n" word.