Why do you think DS is not a dependent this year?
Does he have any income?
The Lifetime Learning Credit (LLC) is a non refundable credit equal to 20% of expenses paid (up to $10K). So if he has no tax liability he can't claim the LLC.
He is allowed to claim "board" (but not room) if he lives at parent's home. So he has more than enough expenses to not report the 1099-Q (unless he can and wants to use some expenses for the LLC). Yes, you can legally not report it.
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
If you know the 1098-T to be wrong, use the "hidden box" to put in the right amount. Yes, you can count the fees. Better, yet just leave off the 1098-T (and the 1099-Q), if you're not claiming a credit.
