JVS,
I've done everything you have (and everything else I could think of), but to no avail. Whenever I install to a subdirectory, I can configure 4.7, install/remove modules, templates, skins, etc. However, from time to time (seemingly at random), I'll get the System.Permission.FileIO nonsense and be SOL for a bit.
Admittedly, the procedure to move the installation from the subdirectory to the root never worked for me -- although, ALL the requisite permissions are retained in the move. The root directory issue is one of a 'Null Reference' error (rather than the FileIO error), possibly due to the use of 'default' page skins, rather than specifying a skin for each page.
The explanations for the FileIO error problem on 1and 1 in other threads on this forum include your theory about 'Medium Trust;' a DNN issue randomly preventing the application from correctly mapping to the application subdirectory, resulting in the FileIO error whenever the incorreclty mapped path to web.config cannot be opened; and a 1and1 issue with AJAX, which purportedly might be resolved by turning AJAX off. Take you pick. I've tried every combination of possible fixes that have been posted to these forums without success.
For the time being, I believe that 4.7 simply CANNOT be run with confidence on 1and1. If I found out differently, I'll certainly post back to this thread to let everyone know.
Thanks for your reply.