What to do about advisor with history of possible plagiarism?
First, don't assume that it is plagiarism without more evidence. Parallel research is very common in many fields and a 30 year old paper may not have been well known in the time frame your professor wrote his/her paper. It may well be plagiarism, but it isn't necessarily so. 

It is appropriate to point out the newly found paper to your advisor and gauge the reaction, but it is premature to "complain" to higher authority without solid evidence. You are correct to be wary. But showing it to your advisor could be just an "oh by the way, I came across...". Depending on the reaction you may learn more about their general attitude. 

It would, indeed, be unfortunate to have to work with someone with poor ethical standards and if your suspicions are verified you might try to move to a different advisor. This is less critical at the MS level than it would be later, but as long as you preserve your own ethical reputation, you should be fine. 

But, certainly, the recent instructions about omitting a reference are problematic. It is possible to write a valid paper reproducing and verifying old results without crossing ethical boundaries. But the work clearly needs to be presented that way, rather than as an innovation. If the referees are up to date in the field, such obfuscation may be caught to everyone's detriment.