I've been through this, and have dealt with local ordinances for over 30 years.
First off, you need to READ the EXACT ordinance you are allegedly in violation of. Don't take the policeman's word for it. He's not a lawyer.
There is usually an exception. Local ordinances sometimes exclude race cars, allow 1 project, require a tag, allow a time limit for repairs, etc. Find the loopholes.
Next, you probably need to get it off the property for a bit. Can you take it to a friend or family member's house for 30 days or so?
Here's what you are looking for: The police will be back. Make sure they see that you have complied with their original request (the car is gone), with no need to talk about anything with you. They will record the visit appropriately (probably with pics).
Step 2: Bring the car back. First, do the bare minimum you need to to make it road legal. Get a tag, and insurance, if needed. Park the car in the exact same spot, with the correct tag clearly visible from the street. This will piss off your neighbor, and the police will be back. They will find your car to be legal (you should not have to fix the windsheild). They might give you a little grief, but show them all the paperwork, and you will be set. You will not have to prove that it runs. They will again record the visit, and not be able to find you guilty of anything. This will be their 3rd trip, so your neighbor will be starting to loose credibility.
Step 3: Cancel the insurance. That stuff is expensive, and there is no point in having it on a non-running car. You will get a refund from your insurance company for the unused balance. Do it legally- even if that means turning in your plate. But KNOW what that loophole was (racecar, etc). The car will be technically legal (because you are going to paint a number on it, or whatever), but still pissing off your neighbor.
Step 4: Turn the car around so that the tag (or lack thereof) cannot be seen from any public street, or from the property of Mr. Disgruntled Neighbor, or alternately cover it with a car cover (better). Mr. DN will probably once again call the police. They are generally not allowed to enter private property without a search warrant, and will therefore not be able to see the tag or VIN. Additionally, they will be on their 4th trip, each time observing the car in a different position (so it is obviously in use). By this time they are getting a little pissed and Mr. DN has lost all remnants of credibility, so they will probably not push it any further. That's good, cause you don't want to go to court. But if you HAVE too, you still have that loophole.
Vandelism is not cool.
Good luck!