The 361/407 engines really like to be fully warmed up before putting them under load. If you put a cool engine under full load on the dyno, most of them with the original style head gasket will leak some between the block and head. They seal up when they get to operating temperature.
A new style head gasket may cure your problem with the seepage but running in a lower gear until up to operating temperature may make it less noticeable.
When the head is off it should be checked for straightness but I would not have it surfaced unless it needed it to be trued up. Most of the later diesel engines have a spec that only allows about .010 to be removed from the head surface. That doesn't necessarily mean that it won't work if more is removed, but that is the minimum head thickness that IH published.
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Today's Featured Article - Tractor Profile: Farmall M - by Staff. H so that mountable implements were interchaneable. The Farmall M was most popular with large-acreage row-crop farmers. It was powered by either a high-compression gas engine or a distillate version with lower compression. Options included the Lift-All hydraulic system, a belt pulley, PTO, rubber tires, starter, lights and a swinging drawbar. It could be ordered in the high-crop, wide-front or tricycle configurations. The high-crop version was called a Model MV.
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