First order of business was to see if a 700x35c rim/tire would fit the frame. I held off on buying wheels until I could determine if the frame will take a 700mm wheel. I borrowed the wheels from Qimikom (commuter) to see what kind of clearance we'd have. From the front, everything looks great! Plenty of clearance on the seat stays and the chain stays:
The back is a different story:

It's loose enough that the wheel slightly spins but there's definitely friction. I was able to ride down a hill, but the friction took over as soon as we leveled out. This was of course with no pedals, no gears, no brakes. Harrowing experience being at the mercy of tire friction ;).
Here's a close up of the back if anyone needs a reference. 1.125 inches is the choke point:

Without whining too much, 650c wheels look stupid and don't fill out the frame and therefore aren't clean in my book. The front fork takes a 700x35c like a champ, which is just asking for the back to, too.

Buckle up kiddos, I'm dead-set on using 700x35c.
After eyeballing the choke point, I Dremeled a nice chunk out of the frame:

And then applied a rust inhibitor to prevent the steel frame from rusting.

Now the wheel fits perfectly! Note that the portion of Aeloung I Dremeled through is not a structural part of the frame. It is fairly thin steel and only exists to keep the rear of the XtraCycle from bowing out with heavy loads, especially if you use the bottom extension bars. The frame is still 100% solid and in no way structurally weakened, except if I were to haul a 500 pound gorilla up a hill, which exceeds the weight limit anyway. Dremeling isn't a problem because the outward stress due to weight is contained by the wooden deck on top once it's secured with a strap. My worry that this will backfire: 0%.