C1 is reporting the SMTP transaction error. EMAIL uses the SMTP protocol, along with any other layers (e.g. security, TCP addressing, etc.). If any of those error out, the C1 bit will come on.
DmLogger can help diagnose the issues your PLC is having. It can turn on some bits in the PLC to send event log information by the PLC to DmLogger.
Although it sounds like you have a good idea what your issues are, DmLogger can provide some details of what the PLC is actually doing. Look at Debug->Do-more Logger in Designer. You will want to temporarily turn on Enable Message Dump ST36 in the pre-view dialog to DmLogger. This will broadcast the EMAIL SMTP events out the PLC's Ethernet port, allowing DmLogger to show you those.
Don't forget to turn ST36 bit off after you have some DmLogger entries that provide you with the information you need to take the next step (you can always turn it back on again when testing EMAIL again).