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Then maybe that's why they got rid of the terminology "derivative work" and replaced it with "covered work" in gpl3.

No, those are two different (though sometimes related) things. A "derivative work" is, as has already been mentioned, defined in copyright law. A "covered work" is a work "covered" by a particular license (GPL3 in this case). A derivative work of a GPL3 covered work would also be a covered work. But a derivative work of a BSD-licensed covered work might or might not be a covered work.

Hypothetically, MS could release a free educational edition of MS-Word which was only to be used for public domain educational research papers under a license which explicitly revokes the rights for any other use. Do think someone could obtain MS-Word under this license and legally claim that they're entitled to use Word for private/commercial work when they get caught? If not, then how the GCC case different? Keep in mind that both the GPL2/3 revoke rights in this manor.

Hypothetically, Microsoft could do that, yes. The cases are different because that's not what the GPL says. Again: "derivative work" is a legal term explicitly defined in copyright law.

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