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Well, flipping the driveshaft would require drilling another hole for the impeller pin…I wouldn’t chance it…Find a decent used driveshaft….
The oring could be stuck up near the powerhead, but I doubt it…
Tip the powerhead upside down, spray some WD40 down inside the crank splines.. Manually insert the driveshaft in and out of the crank several times to clean out rust/old dried lube. Tip the powerhead back upright and insert the driveshaft only about half way into the crank splines and try rocking it back and forth to see how much play/wear might be present in the crank splines… Your pictures aren’t that clear, can’t really see the wear in the seal area, but the upper splines appear to have some wear.
Was the gear oil milky/watery when you drained it? Perhaps the gearcase was holding oil OK in spite of the groove.
This becomes a judgement call at this point. Obviously your beloved BIL doesn’t want to spend a nickel on this thing, but expects it to be like new after you get done with it…If the gear lube looked “OK”, you may just want to put the thing back the way it is before getting in too darn deep on this project…