All of the federal tax liability numbers given would have been substantially higher (about 40% higher) had they included a 10% early-distribution penalty, so none of them do. Code 4 in box 7 of the Form 1099-R eliminates the penalty even without explicitly indicating to TurboTax that the distribution is from an inherited IRA. Indicating that the distribution is from an inherited IRA just prevents TurboTax from including the distribution on one's own Form 8606 in the case where one has basis in nondeductible traditional IRA contributions in their own traditional IRAs.
