You say you set the pressure at 40 psi with the spacer. How does the trans shift at "normal" throttle at that setting?
Is the throttle lever (TV valve) bottomed out at WOT?
Have you checked mainline pressure?
Mainline should be...
@ idle in D ... 52 - 65
@ WOT stall... 220 - 240
@ idle in R... 85 - 125
@ WOT stall... 290 - 325
If pressures are correct, then the trans should not burn up like that.... unless there is an internal leak somewhere or the throttle valve pressure is not increasing proportionally with throttle movement. (TV valve not reaching full when the gas is floored).