I wonder if the machined recess in the head was an attempt to lower the compression in order to run racing pistons on street gas?

Doing a few quick calculations:
If your pistons were truly 10.5:1 [generally Mahle is pretty optimistic] for a stock deck height (1.0mm) and chamber volume, adding the second plug should shield around 10.1:1.
Now taking your 1mm recess into account, you can expected a further reduction of
nearly 1.0 compression points, yielding a static compression ratio of around 9.1:1.
The DC 35 (108) should boost your dynamic compression but you are still looking at a pretty low final number.

With the racing valve springs and titanium retainers, you should be good to 8000RPM. I don't like running big pistons that fast, but I prefer low to mid RPM torque on the street.

Thanks for doing these calculations Henry, that is helpful.

I'm assuming the 1mm stock deck height would be measured from the top of the cylinder to the piston edge. Currently my deck height is at .3mm to the cylinder top but adding the 1mm for the recess in the head brings me to the 1.3mm. This would obviously increase the CR over your calculations but my question is, it safe to do so? Should I be keeping a 1mm deck height and not consider the 1mm recess into the head or would this be creating too large a pocket around the outside of the piston.

Other than a decrease in performance, would the 9.1:1 CR cause any other issues? The engine is going into a 914 so I'm not concerned about getting GT3 power. :)

Compression in these old engines is over-rated. With your cam choice and desired red-line you'll be fine.

Because your heads were cut in an unusual way, honestly I'd cc the heads and do the calculation. It doesn't take much to alter the head volume by a few cc, and that could easily change the CR by a few tenths.

It sounds like your heads were cut rather than the more conventional way of getting additional clearance (adding gaskets or spacers under the cylinders). So the combustion chambers, though a little larger now, are also sitting a little "lower" relative to the cylinder. It's all going to come down to the combustion chamber volume, and setting the piston the head clearance where you want it.