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Sure enough. I just confirmed that with Python 3.2.0, if .pypirc is symlinked, distutils behaves as if the .pypirc isn't present at all, but if that same .pypirc is copied, it behaves as expected. If one deletes the .pypirc altogether, it produces the same error.
Furthermore, this issue was fixed before the release of 3.2.2 (probably in 3.2.1).
My guess is that with the PYPIRC_CUSTOM_SERVER, it was somehow not being installed or resolved correctly, so the content was irrelevant.
I suggest we mark this bug as resolved (as the primary cause was due to the file not being read at all), but also apply your patch (which has some other good fixes) without the CUSTOM_SERVER, or with a version of the CUSTOM_SERVER that works.