Generally, the amount as reported on the 1099-R is fully taxable as §1.122-1(d) does not grant authorities to the taxpayer to adjust the taxable amount due to net disability exclusion under §104, pursuant to §1403 of Title 10.

Instead, the DoD would, based on its own (and not the VA's) disability rating for the veteran, compute the net disability exclusion in conjunction with VA's disability compensation and report the correct taxable amount.  If your client believes the taxable amount reported is not correct, he needs to work with DFAS to sort that out.

The only time when an adjustment may be appropriate, which calls for a different process, is when retroactive adjustments from the VA are made, likely due to delayed VA disability determination.