That seems to be a common problem with the 16hp Vanguards. I picked up my 1641 about 10yrs ago because the guy thought the block was cracked. LOL Got it for cheap. I found out that seal in question was popped out. When reinstalling it I used Permatex ultra blue and it's been holding. I found the bore the seal sits in to b e on the loose side as well. 
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1641, 1541, 682 with 18hp command engine and hydraulics from a 782. 1872 with a power angle blade.
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