Abby, I agree with RustJunkie, often with an overpainted bike much of the original paint is remaining under the overpaint. In areas where the paint was scraped away it will rust (as you see on your bike). Many paints come off very easily; others are more tricky to remove but it is still worth the effort to try this first.
There are several posts on The Cabe that discuss paint removal. The bike will have the most value if the olive drab can be saved. It will be worth a couple thousand if this can be achieved. You can buy basically the same model Huffman in a 1946-47 (non-military) in overpaint for a few hundred that you can paint red and ride to death.
Regarding the basket, it would not have come from the factory with this but may have been added at a military base.