Strong northeaster yesterday on Lake Erie so all fishing plans were cancelled and I had time to troubleshoot my fuel problem. Here is an update ...
We cut both wires at the butt connection at the sender end of the system (in the photo above) and the gauge reading immediately went to empty. So we figured the cause was a faulty sender as we suspected. So we took the sender out of the tank and just to be sure checked resistance. Much to our surprise it was working properly, so we figured the cause was wire continuity or the butt connection in the photo above. We weren't exactly sure how to check the continuity of the wiring ... so we re-did the butt connections and with the sender out of the tank manually cycled the float up and down. The gauge reading followed ... so it appears the root cause was the butt connection. Doesn't make sense to me because I would think that a poor butt connection would mean there is more resistance in the circuit and the gauge reading would be lower then actual. My problem was the opposite, the gauge reading appeared higher then actual.
We also noticed a slight build up of metal dust on the sender float, similar to what you would find on a magnetic crankcase drain plug. Maybe that affected the output of the sender. Not sure but it appears everything if functioning properly now, thanks to all for your help.