How do you play it?

the hero goes to staging area in you are in 1b?

if you kill hero, does it return to owner's control?

If you kill him off he dies.

Miner of the iron hills & ally Elrond are your friends.

Or Power of Orthanc (my personal go to condition removal)

If you lose all your heroes, and the Fallen into Evil is still alive? What happens then?

As it says both "lose the hero card type" and "return attached hero to its owner controller" I assume you don't control this hero. So if you lost all your other hero, you should lost.

It reminds me of Foundations of Stone, where your hero can get shuffled into the deck. In that situation, you have not lost the game even if your last hero gets shuffled in. Also with Desperate Alliance, if you give control of your last hero to another player, you clearly don't control that hero but it's been ruled that you don't lose the game in that situation, either. But! If your last hero in play is the captive in Escape from Dol Guldur, you have lost. All this is in the FAQ.

Bottom line: no amount of logic can clear this up. It's worth submitting to the developers, I think.