Basically, it doesn't matter what actual money was used to pay for what expenses, at tax time you are allowed to allocate expenses for the best tax benefit. TT is going to allocate box 1 tuition to the box 5 scholarship even if you consider it " true out of pocket tuition paid directly to the university".
Q. Maybe I am just better off in NOT entering the 1099-Q at all?
A. Yes, unless you're able to work your way through the idiosyncrasies of the program.
You didn't mention whether you are eligible for the education credit (American Opportunity Credit) which would require allocating $4000 of tuition to it. You would need to come up with $10,488 more expenses (Books, a computer and room and board) , rather than $6488.
