What's the 1099-R gonna say? (it better say $872)
I would have w/held 10% on 872.
Why wasn't the fee done separately? Basically the owner is paying taxes on the fee.
Did another person adopt the child? Did the father legally release his parental rights? If so, then I think family attribution is broken. (Just like an adopted child gains rights). Tough questions to ask, but necessary. Just a name change is not enough.