What is your reference for that opinion? It's not addressed in Pub 970. Reading Pub 970, this user concludes that a pre-paid tuition 529 plan is treated the same as any other 529.
Even if tax-free distributions from prepaid tuition 529 plans can only be used to pay for tuition and fees, that does not prevent you from declaring the distribution to be taxable and using the tuition to claim the American Opportunity Credit.
TurboTax is doing that part correctly. What it may not be doing correctly (I haven't run a practice problem to test it) is allowing the user to allocate room and board and books and computers to the 529 plan. I suspect (from reading Pub 970) that that is allowed. Even if not, it's not an area of enforcement with the IRS.
