To all....per my calls to my tax software company, Creative Solutions Ultra Tax Software (one of the largest tax software providers) and the Advanced Tax Matters Section of the IRS, you cannot make distributions tax free to the account owner, it does make a difference. And, it makes complete sense. However --- continue reading for how the IRS is dealing with the issue.
Overview for non-tax people --- 529 plans operate like irrevocable trusts, they are a completed gift but the grantor gets to keep control over the funds. Owners of irrevocable trusts can never take the money back for themselves, but they decide when money is paid to the beneficiaries.
As it relates to 529 plans, if the payment is made to the account owner, the earnings are subject to tax and the early withdrawal penalty applies (Sec 72). Per IRC 529 and Publication 970, distributions are only allowed to the designated beneficiary (which makes total sense because they operate as trusts).
Payments directly to qualified institutions for tuition payments on behalf of the designated beneficiary are allowed.
In speaking with the IRS --- there is a known problem with distributions being made directly to parents because the account owners. They know that the bulk of this problem is being caused because they have no control over the state programs, such as Edvest in Wisconsin, who are telling people it's ok to make distributions to the parents. Your point about IRS matching is now becoming an issue. This is how they are handling the issue. Notices are being sent to taxpayers assessing tax on the earnings and subjecting the earnings to the early withdrawal penalty. If taxpayers correspond and explain there were qualified education expenses, they abate the taxes and penalty -- one time only -- and advise them never to do it again because the penalty won't be abated a second time.
The answer is : the account owner is not allowed to take a tax-free distribution of earnings, only the designated beneficiary, as is stated very succinctly in Pub 970.