Hi g5e,
Since the dilemma is really his, I would put it back in his lap by telling him something like "As stated in our listings that upon receiving his returned item in its original condition we will issue a full refund less the shipping charges. The choice is your of course, thanks and come again."
By doing so it is reminding him of what he agreed too in the first place from your TOS in your listing and you have also responded in a professional manner leaving the options open to him. And your have documentation if things escalate.
You can't worry about feedback or DSR's as in reality they are now meaningless within the new system IMHO.
I would also forward the buyers request to eBay as bad buyer behavior as it is filled with innuendo and threats. eBay says they will be more aggressive with bad buyer behavior so we need to hold them to their word.
Gehres
Gehres