If the water in the oil is really just a little, I suspect you have a bottom seal leaking on one sleeve. A head gasket or ckacked head/block will usually leak quite a bit more than the o-rings. You may want to try an application of a stop leak type product before spending a lot of time disassembling the tractor. The best way to tell is to pull the head and have it magnafluxed for cracks. Have it checked for warping too, while it's off. If it isn't cracked, and the head is warped, but fixable, it will probably be the problem. You will need to install a new head gasket anyway after pulling the head. The A-C blocks for the WC, WD and WD-45 were all prone to cracking between the cylinder bores on the top surface of the block. This is not a problem as the cracks are sealed by the head gasket. If the block is cracked between the bottoms of the bores, then you have a real problem that will require a replacement block, welding and machining the old block or some other method of repairing the old block.