You must enter the From 1099-R as received. You must not change the distribution code. Code 2 just means that no "extra" tax applies, i.e., no early-distribution penalty.
By inappropriately changing the code to 1, you are causing TurboTax to treat the distribution as subject to a 10% early-distribution penalty until you indicate that the distribution was converted to Roth.
To determine if the distribution is being tax properly, examine Form 1040 line 4b to see that the taxable amount is present.
