My mom received a 1099-r which had a code 7 in box 7. that means normal distribution. She just started to receive this money this year due to the fact she turned 55 and is disabled. Is this code correct or should it be code 3 for disability?

It is probably correct, if the disability comes from her company as part of her company long-term disability plan.

Disability payments are TAXABLE income if the beneficiary did NOT pay the plan premiums, which would be the case for an employer-provided plan.

Is this distribution from a 401(k) plan or an IRA? If so, then your mother can avoid the normal 10% early withdrawal penalty if she is totally and permanently disabled. She should include form 5329 with her 1040 form - otherwise the IRS will expect her to pay the 10%.