I might be talking rubbish but if ya spinning it with points not doing there job [not closing] does that load up the coil with voltage of sorts then flicking the kill switch quickly releases the stored energy. Maybe not high voltage/amperage but enough to spark across the plug out of the motor. 

Sounds like the points are not closing the circuit to the primary side of the coil. They could be adjusted too far open, a bad wiring connection and/or dirty/oily. I don't have a wiring diagram for your model but I suspect the kill switch brings the primary side of the coil to ground like the points do (but at precisely the right time in the compression cycle). 

RT325 pointed out that the points should just start to open at the timing mark alignment. If they are set with a gap at this orientation they will not close at any position of the crankshaft. So you'll not have any spark. But you may have spark with the drill/kill switch experiment you are using because the kill switch would be emulating the action of the points.

A resistance meter (ohm meter) is a good way to verify points opening and closing.

I spun it both ways and nothing changed

Yep i'm with #12. & yes the kill switch shorts the primary to ground all the way to the source coil in a roundabout way. Ohm meter is a good way to check opening moment. But ya gotta have a keen eye on an analogue ohms meter to see it move on the lowest scale. & you'll be moving the flywheel ever so slowly past the opening moment. Man i wish i'd not ruined my original Yamaha points checker by leaving rotten batteries in it in the "70's. Well how was i gonna know i'd need it again 50 years later!! haha.

bad points was the awnser!! I threw the original points back on and sure enough it sparked good and its running awesome right now. The only issue is a bad clutch slippage. it seems like these yamahas have the weakest clutches. Im gonna pull the side cover off and take a look at the wear of the plates.

Hey, success. Top marks sir.

Clutch plates WAY easier than spark!!

Great news - well done and thanks for posting.

Faults down to poor quality or counterfeit ignition items (points, condenser, spark plug) are getting quite common now, so well worth sourcing originals, or recognised period quality replacements (eg Daiichi points).

Not much can make points faulty. Be interesting to pin it down to just 'what'!!. Sorry i just like to know ya no, haha. Nosey bugger me!!. Had some once [12 volt not mag] & the button fell of one side & man it thought it was an arc welder, & 'that' was the reason [no points button]. What are points [call them buttons tonight] made of--special stuff for sure.