You may be correct. The taxpayer emphasized that s(he) sent only $25 on medical expenses, but perhaps that was only out of the $300, not the $1,000.
If so, and if the $700 was indeed spent on qualified medical expenses, then the taxpayer should report $725 as qualified medical expenses.
Note, however, that Publication 969 does not address the situation of withdrawing HSA amounts in one year on the possibility that they might be spent on qualified medical expenses in a future year, but only the reverse - that when the taxpayer spends out of pocket funds on qualified medical expenses, that, after the fact, a withdrawal from the HSA can be made to reimburse the taxpayer.
If you have some documentation on this particular case, I would love to see it and add it to my collection.
