The exception for scholarship recipients who also have 529 plans allows funds to be removed from529 plans without penalty up to the amount of the tax-free scholarship. You still have to report the gain on the distribution. If the distribution doesn't exceed the amount of the student's qualifying expenses, then you don't have to report any of the distribution as income on your tax return. If the distribution exceeds these expenses, then you must report the earnings on the excess as "other income" on your tax return. If the student is your dependent, any gain should be reported on your tax return. If the student is not your dependent, then the student should report the gain. It doesn't matter if the distribution (1099-Q) sent to/in the name of the parent(s).
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