What's the source (either from the gemara or rishonim) for allowing stam wine to be batel in 1/6 mixture?
Does this apply if you can still taste the wine?
The earliest source is the gemarah. Gemarah Shabbat 77a says that the standard ratio for dilution of wine with water (diluting wine was common in those times) was 3:1. The gemarah in Avoda Zara 73b says that if you have two cups of wine, one of which is forbidden and one isn't, and mix the two together, the resulting mixture is permitted.
The Raavad and the Ri do the simple math that if the two cups contained 1 part of wine each, there would be a total volume of 6 times the forbidden volume, and therefore the ratio for dilution must be 6:1. The Raavad's rationale is that water adds a detrimental flavor to the wine, and is therefore notain tam l'pgam.
The Rashba and the Ran disagree with the Raavad's reasoning, and hold that the reason wine is nullified in 6:1 is because when mixed with that much water it stops being wine, and becomes acid.
Tis opinion is mentioned in Tur YD 134 and attributed to the Raavad and the Ri. (The Tur also mentions other opinions, that nullification of wine will require a 60:1 ratio like other isurim). The Shulchan Aruch YD 134:5 states it as halacha, and the Rema agrees in YD 123:8.