Good fix! Lapping the flywheel taper is one of those things nobody thinks about but makes a huge diffrence. The rust buildup on the ring magnet was probaly causing the flywheel to sit slightly high on the crankshaft which shifts the trigger position relative to the sensor — thats why the timing...
The seal flange goes toward the thermostat housing (facing outward/away from the block). The flat side seats against the thermostat itself. Think of it as the flange creating a lip that the housing presses down onto to make the seal.
Also regarding your earlier question about water flow...
