What you say doesn't make so much sense: "They are not 2 different partitions because they are not on 2 different drives".
In fact the hard drive has even more than 2 partitions.
Also, why do you say: "Space that you overwrote that you thought was unused was hidden OEM recovery. "
I was clear that I first "reduced" the size of the "C" partition, and then using the space that was freed from that process I created a new partition. So the new partition that I created should not affect any of the other partitions. I think the issue is the recovery software from DELL, that seems to be built on top the native recovery option from Windows. But somehow DELL's recovery software seems to work fine only when the structure of the whole disk is the same as when the PC came from DELL.
The recovery partition is still there in my case, but the software from DEL doesn't work properly.
Observation: the image that you have in your post above belongs to the structure of a traditional parition table with MBR. But the disk in the XPS 8500 seems to have a GPT structure:
This from: Microsoft: Disk sectors on GPT disks
I confirmed this by temporary replacing the hard drive in my XPS 8500, with a new one. When I tried to install WIndows 8 in the new disk, there was an error, saying that Windows 8 can not be installed on a MBR disk, and that I had to convert the dis to GPT.
I connected the this disk to my Win7 laptop (using an external enclosure) and with the Disk manager in Win7 I converted the disk to GPT. Then Windows 8 installed without problems.
I think DELL should remove their software for backups and leave only the native 'Recovery' option from windows. Also they should provide a recovery disk that can be used to re-image only the "C" partition, refreshing only the operative system and leaving un-touched DATA partitions.