I think it is because the Defocus FX you use is too subtle to see inside the small masked area.
If you change your Defocus FX against the Black&White FX you will (more or less easily) see the mask.
So the mask is working but the FX inside's isn't strong enough within the small mask area.
Or otherway round: The media you used isn't suitable for the combination of such a kind of mask combined with such a kind of FX. You would need a clearly detailed and sharp media to make the FX come through this mask.
If you take off the Defocus then the mask area will be as sharp as the original media is. But if the original media is only a smooth color gradient - there will be no visible effect. Change the color gradient against a crispy sharp 4k camera shot and you will clearly see the masked area or the difference between Defocus on/off.
I removed your mask and created a border around the area where your mask would be. Then I made a screenshot with Defocus FX applied and another one with Defocus FX removed. You'll see in the area of your mask would be nearly nothing visibly affected by the Defocus FX.
But you set the mask option to mask the fx part of the event. So the one part of the mask shows the event with defocus applied, the other part shows same event without defocus. Then again for this certain event there is little difference between defocused and none-defocused.
Your mask is not set to mask the event itself but the fx only.
In Pan/Crop for the mask, on top of the left pane you set the mask to apply to FX. If all you do is removing the Defocus FX you totally swept out anything your mask eventually could do for you. You set the mask to apply to the FX, but there is no FX.
What you need to do is to turn off the mask option to apply to fx.
" I'm sure I've been able to apply an FX to JUST the interior of the Mask - no?"
Yes, and it will work same as it already works in the project you offered for download. But we move in a circle then because - as mentioned above - your media (the color gradient) combined with this certain FX (Defocus) won't make sense with such a mask at this position. It is like applying a black&white effect in a region where only black appears.
"Now, Marco put a BLUE Background on a Track Below."
With that certain mask option (see screenshot) turned on or off? If on (like in your project file), what should the Defocus FX affect?