Hi Minnesh,
The XXXS is great for 540, I got 2nd in the state with it running in the 540 class, agaisnt FT TC4, T2, 415, Mi2, TC3's, etc. With the diffs if you are running balldiffs front and back i would run the front one fairly tight and have the rear one loose enough so the diff doesnt slip.
With the gearing i ran a final drive ratio of 4.28 with the 540 motor. It did get really really hot but, my pinion was 32 and my spur was 75(i had the gear adaptor) and i was running standard height rubber tyres. In your case i would run the 38 pinion on the 86 spur which would give a final drive ration of 4.14 (i have run down to 4.11)
To see if your drivetrain is free, just take the motor out or the pinion off and push it along the ground, it should roll for a while with a good push, if it slows down all of a sudden there is something binding in the drivetrain or somethings to tight.
Also you say that your son is on your back the whole race with his TT-01, could he just be a really good driver? (Sorry if that might have sounded like a stupid question)