Since you say the distribution was used for tuition, that would lower Box 1 to zero, so the 2,000 scholarship has nothing to be matched to. It would be taxable income.
Box 1 does not report tuition AFTER the scholarship, it should report ALL payments made, whether paid by a distribution, scholarships, or cash.
I assume she had Room and Board expenses, whether in a Dorm or her own apartment (even if living at home).
I suggest you allocate part of the distribution to food and lodging expenses/Room and Board. I would think that would be in excess of 2,000. It cannot be more than what the school would charge for on-campus housing.
Pub 970
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