> Where do we draw the line?
not at the license. it makes no sense for a work to magically cease to be "fanfic-able" the moment it enters the public domain. thats arbitrary. fanfic is only incidentally, not fundamentally, about copyright. licenses are about copyright. approval of a particular work is not.
> Scenario #1: Author A dedicated their story to the Public Domain. Is it fan fiction if Author B uses that Public Domain work?
yes.