Yeah, rebuilding the spare engine, then installing it when finished is looking like the best option right now. Yes, the valves were closed with the piston at TDC when the checks were made. Air was escaping around the pistons into the block.
Do some simple tests on the spare engine, and find out if it actually needs rebuilding! Or Pay someone to do the tests to find out if you have an engine that needs to be rebuilt. Slant 6's are durable engines, and the likelyhood that you have two that both need rebuilding is uncommon.
