While I cannot specificly remember doing this on flathead cases, I have updated early knuckle case more than a few times, and the procedure should be pretty much the same. From my notes:
Bore out "plates"on outside ends of the race bore in cases. (The more accurate job you do, the more support you will give for the new race.) Counter bore flywheel side of right crankcase half (pinion side) to 2.225" diameter, .135" deep to allow new pinion race to be pressed in to correct depth. (This counter bore is for the shoulder on the new race.) The sprocket shaft race will install "as is" once the outside plate is removed.
NOTE!!! These are my notes for a knuckle! The counter bore depth may need to be different for a flathead. You really need to take some accurate measurements of the inside width of your cases when they are bolted together, your flywheel width from thrust washer to thrust washer, etc to insure that the flywheels will be centered as original when you are all done. With all the variation I see in everything from crankpin width to shoulder thickness on aftermarket races, I don't think one can safely give firm figures without measuring each particular aplication.
Yes, then you can use the late style Colony sprocket shaft seal. Any good machinist shaould be able to do all this for you, and in my opinion is well worth the effort in order to "line lap" the races.