You are basically allowed to allocate expenses anyway you want, allowing for the restricted scholarship. So first you allocate $4000 to the AOTC, for the maximum $2500 credit.
Taxable scholarship is treated as earned income for purposes of a dependent's standard deduction, so none of it will get taxed ($2,935 + $3,398 + 400 = $6733 standard deduction, using your numbers).
The taxable portion of the 529 is so little that it won't get taxed (my quick calc, says none of it is taxable)
Basically, he doesn't need to file a tax return, but you may want to just to document the reporting of taxable scholarship (to free up tuition for the AOTC).
The parents claim $4000 of tuition on their return to get the max AOTC. For simplicity, enter the 1098-T with $4000 in box 1 and box 5 blank. The 1098-T that you enter in TT is not sent to the IRS.
That's the basics. I may crunch the numbers later for specifics, which you shouldn't really need.
