It seems obvious that Congress MEANT for it to be tax-free.  But they didn't write the law that way, so the IRS ruled the way that they did.

In order to correct it, Congress needs to correct it.  So if you and your clients are so inclined, write to your Congress person.  But since Congress seems to be pretty useless and only argue all of the time, it is questionable if writing to them will have any effect.