Stencil zfail is for when both depth and stencil fail, and again it doesn't affect what gets drawn but rather what happens to the values currently in the stencil buffer.
MSDN says zfail is for when the stencil passes but depth fails. Is this correct?
Anyways, what I want to accomplish (going back to the first post) is for the terrain pixels inside the cardboard box to be discarded. If there are terrain pixels in between the camera and the box top, they need to be rendered (this is currently where I'm struggling). If terrain pixels behind the box get discarded, that's fine because the box would over write them anyway. I hope that makes things a little more clear?