In 2006 my brother withdrew (not a loan) $5,000.00 from his 401(k) to go towards his daughter's first year tuition. What tax liability is he facing?

He will owe normal state and federal income taxes on the $5,000 PLUS a 10% Early withdrwal Penalty if he is not at least 59.5 years of age.

The better way for him to have handled this was to roll the money over into a rollover IRA, then withdraw the money from the IRA. That way, he could have claim the Higher Education Expense exemption, which applies ONLY to IRA withdrawals, not 401Ks.