An 8N with oil in the water is definitely a crack. There's no other way. Oil pressure overrides water pressure. "Drain back" can't generate the pressure needed to override water pressure. The oil gallery that runs the length of the block may have a crack to a water passage. Sleeving the gallery is a known "fix". Blocks are getting harder to find, but you WILL find them, the further East you go, the easier they are to find. We "do" an average of about 3 8Ns and a couple 9Ns a year.
"Pressure testing" the block is a way of finding the problem, but it will need to be completely disassembled and cleaned first. Your local machine shop with tractor experience is exactly correct, per MR.
Jim