How to install headset with Triple Tree Forks?

Which way is the right way to install the headset?

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Or this way?

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And if it is the second way, do I cut the steerer tube flush with where the clamp is, and then install the top cap just against the metal?
What frame is that? Looks like a frame with a built in tank but never seen one with an integrated headset.
 
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Unrelated, but this is just a mock-up of the bike, nothing is actually installed completely. I'm painting the frame tomorrow, it's going to be Hugger Orange if any of you are familiar with that color from classic camaros?
 
I bleed hugger orange, but it's mostly from fixing my broke down Chevies lol. Still love them though. What kind of tires are those? Are they completely slick as they look in the picture?
 
I bleed hugger orange, but it's mostly from fixing my broke down Chevies lol. Still love them though. What kind of tires are those? Are they completely slick as they look in the picture?
Yeah, I just got the frame primed today. They're thickslicks. 26 x 2", they are completely slick, yeah. Here's the link.

EDIT: that's the wheelset lol, but the tires are 26 x 2 thickslicks.
 
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yeah I was going to ask if this build is going to be a racer? from the looks of the tires,,
 
Do they actually feel thick?
Yeah even when they're pretty flat, like if I press on the sidewall they're pretty squishy, but if I press on the top it feels like the tire is full I guess? They say the rubber is double thick on top, and it definitely feels like it. I'll let you guys know how they ride once I get this build on the road.
 
yeah I was going to ask if this build is going to be a racer? from the looks of the tires,,
I don't plan on going to the track, but it definitely looks like a racer yeah.

EDIT: I read somewhere that tread on bike tires don't help really in the rain, and that it's more about the stickiness of the compound, and I never ride in the rain, so I thought they'd be good tires.
 
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