Get a bigger fawkin' hammer. Or smack a pickle fork in the lower and put a little pressure on it, then give the knuckle a good whack. Should just drop right out.
The slotted threaded piece is the preload adjuster so that minor variations in casting can be adjusted out by threading the upper ball joint seat in or out. When you put the axle back together, if you use new ball joints, you'll need to follow the proper procedure for installing to make sure you get that threaded piece in the right spot.