ken,been around[done] a bunch of hydro testing on vessils,pipe,etc[never on a air compressor I will admit],but,never heard of putting the thing you are testing inside a tank full of water,we always filled the vessil WITH water and pressure it up,sometimes to thousands of psi,[water is much more safer if it lets go than a gas],now maybe you are talking about an air test? That might be how they do it at a air compressor factory? put the tank in another tank of water and look for bubbles? but that ain't a hydro test.,
if you want to do an air test alls you need is some soap bubbles,they call it snoop,but you can make your own.
And yes,thats the way you hydro test something to asme.I mean you could put it in a tank of water if you wanted to,but you don't need to,generally 1 1/2 times design pressure is what you test at,doubt if that tank has more than a 300 psi design pressure?
As to your question about should you tell them green mule said it was ok if it kills somebody,can if you want,but I ain't welding on his tank,so...
I wouldn't be worried about welding on an air compressor tank[if I had to],welded on much more dangerous stuff than a little ole cheap air compressor tank,but like I said,do not plan on welding on mine,he's talking about his,and if he wants to,its his,