The black wire coming out the magneto in the bottom picture, should go to the switch built into the back of the rack-and-pinion speed control mechanism. Yours has been re-wired by a previous tenant, and now has a toggle switch on the dash replacing the original switch on the speed control. That wire (black out of the magneto, and inexplicably switching to red halfway to the toggle switch, just to confuse all later tenants) is the kill wire. You ground it to switch off the engine. When you are checking spark, if you do not get a spark, you should disconnect that black-becoming-red wire, in case it is grounded due to a malfunction.
Like all magnetos, yours generates low voltage in the primary coil as the flywheel magnet passes the laminated iron poles of the magneto. At exactly that moment the breaker points behind the flywheel open, and the sudden collapse of the magnetic field in those iron poles creates a very high voltage in the secondary coil, also in the magneto (wound around the outside of the primary coil). If the kill wire is grounded, the live side of the breaker points is grounded, so no voltage is induced in the magneto secondary coil.
