My 2006 Subaru Baja overheats when driven. It will idle all day and not overheat.

Can we assume he's checked the cooling fans are coming on, and there is no presence of hydrocarbons in the coolant?

Yes.

Possible head gasket leak. It is a Subaru after all.

My mechanic doesn't think so. no noises, and I doesn't overheat at idle. He is convinced that it would overheat at idle if it was a head gasket.

I would find another mechanic. Driving it places load on the engine and heats things up possibly allowing coolant to escape through the combustion chamber as things expand. Idling may not produce enough heat to cause it to get hot. It think there is a 90% chance that the head gasket(s) are the issue. Subarus have a reputation for bad head gaskets. How many miles on this Subaru?

This is a rebuilt engine with about 45,000 miles on it.

Park it facing up hill on a steep slope and try to purge the air again. If you can never purge all the air out that could be a sign of a compression leak into the cooling system.

Rebuilt by who? Symptoms are most likely head gasket and with Subaru's reputation.....

Exactly Bob. There are rebuilds and then there are Rebuilds.

Really does smell like a poorly-purged coolant system (if he's lucky), or more probably a bad gasket job resulting in percolation. Not terribly common in the SOHC 2.5i, but that's the best guess.

Head gaskets require replacement. There was one head bolt that was never tightened. The Subaru dealership says milling of the heads is not required. Two questions: 1. Should I have it milled anyway? Can they really tell that it is ok? 2. The oil cooler above the oil filter has been removed. Is it necessary? Does it make that much difference?

The dealer believes the untorqued bolt is the problem.

The fact that the motor and heads have been overheated correlates very strongly with head warping, so sending them out to a machine shop to check both for cracks as well flatness is DE RIGUER for this one! Your shop will know whether a head is too warped to mill. I believe the limit was 0.004"...can't remember...but milling 0.006"+ can result in subsequent overheating as the head can no longer sink the heat.The dealers don't bother sending out the heads because most of the time they're lucky, but the cost is only on the $150 level to carefully check both heads. It just takes a day or two downtime for them.The torquing procedure for the head bolts has to be reasonably carefully adhered to or gasket failure will recur later as well. Hard to believe someone forgot to torque a head bolt, as the procedure requires several passes over each bolt to bring up to spec.

Heater core is clogged

Unlikely, but I've seen their hoses restricted once or twice.