I received a bad part. What should I do?

I bought a Dodge pickup manual steering gear from a guy that is worn out and has internal corrosion. Before I ordered it, I asked if he had checked it to make sure it was in good shape. He said it was. I paid in full with a USPS M/O and had him ship it to me. When it arrived, I looked it over and found it had LOTS of play in the pitman shaft. The shaft would move over 1/8" in and out at the center point of travel, and a good 1/16" sideways, indicating the bushings were worn. I contacted the seller to let him know what I found. He suggested that maybe putting in new bushings would be the answer. I told him I would take the cover off and see what the gears looked like as I might be able to use them in my old box and make one good gear box out of two. After pulling the top off his box, I immediately noticed that the grease was rust stained (see photo). I wiped off the grease from the pitman shaft and upper cover to find that the gears and bushing surfaces on the shaft were very pitted and the bushing in the cover was very worn out. I informed the seller that the box wasn't in good shape and that I wanted a refund. He offered to give me $30 back of the $85 I paid for the box and I could keep it. I told him that I didn't need a core to build and that I should get a full refund as I wasn't my fault that the box was bad. He says he doesn't think that he should bear the full cost and that I should eat some it. To me, the core isn't worth $5 let alone $55 so we're at a stand off at the moment. What do you folks think is right?