These toothed headset are just crazy. Why do they exist? What's the supposed advantage?
1. Don't mess with the fork or frame.
2. If it were mine, I'd lay a big mill bastard file flat on my work bench and file away the teeth. You'll know it's flat by monitoring the depth of the remaining tooth pattern.
I might do some/most of the work on a stationary belt sander but would do the finish work by hand.
3. I think I might do only one of the two pieces but doing both would look a lot better.
4. Make up for the now-shortened stack height with a spacer.
5. Rust can be prevented with paint or a skim coat of grease.