The fuel level in the filter is of little to no concern. What you are seeing is air trapped in the filter housing. The air volume will vary with temperature changes, or vibration "burping" it out, the angle of the filter, etc. As long as there are no leaks or bubbles being drawn in while it's running, everything should be good there.
Since there is a fuel pump, the best way to test it is to disconnect the line from the carb, start it up and catch the results in a clean glass. The pump should shoot a full, pulsing stream each time the pump cycles. The pump should make about 3 to 5 PSI pressure. Look at what came through into the glass. If it's dirty, rust flakes, water, then that is what is also in the carb!
Also visually inspect the pump itself for fuel leaking around the diaphragm or vent holes, and check the lines for leaks, signs of rot, abrasion or cracking.
As for the distributor, the weights should not be rubbing the housing! Something is worn or assembled wrong. The worn groove "probably" won't hurt anything, but if it's recent damage, the ground up metal is floating around inside the distributor, not going to be good for point life, and can short out the high voltage under the cap.
The old distributors were known for the shaft bushing to wear, causing the point gap to vary, causing poor performance and stalling. The bushing needs to have very little side to side play, no more than .010". If that bushing is worn, a new/rebuilt distributor would be the easiest solution, especially since it has other issues.
If the bushing is good, I would still disassemble the distributor, check the weights and springs, see why they are over extending, clean everything up.
And... Worn distributor bushings are not a major concern for an electronic conversion kit. They are very forgiving of wear, but the weights do need to work properly.
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Today's Featured Article - Tuning-Up Your Tractor: Plugs & Compression Testing - by Curtis Von Fange. The engine seems to run rough. In the exhaust you can hear an occasion 'poofing' sound like somethings not firing on all cylinders. Under loaded conditions the tractor seems to lack power and it belches black smoke out of the exhaust. For some reason it just doesn't want to start up without cranking and cranking the starter. All these conditions can be signals that your unit is in need of a tune up. Ok, so what is involved in a tune up? You say, swap plugs and file the points....now tha
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