Yep, exactly. Grind it, then bend it. If you have to dish your wheel over to the bicycle drive side then you may need to add a spacer on the outside of the coaster arm to keep your RW aligned...or buy new rear sproket bolts with thinner heads so they dont hit the inside of the brake arm.
Hey, nice moto drive pic's augi. that looks slick.
you are soooo lucky i happen to have another coaster wheel here right now.
yours may differ slightly, but this is the general idea.:
hold the arm, use a wrench on the nut and remove.
grind out the center hole on the sprocket to fully clear any metal-to-metal contact.
using a vise and hammer, bend up at the red line area to clear the sprocket bolts, then back down at the blue line area to meet the stay.
put the arm back and tighten down with the nut.
the arm attaches to the inner bearing cone, so be careful to not rotate it on the axle, or you may mess up your bearing adjustment.