Line 14 on Form 8606 did not deduct the basis for a non-deductible IRA contribution we made during the year, and had returned the same year. Any help on why not?

If the contribution was not an excess contribution, TurboTax will not ask you whether or not you had any of the contribution returned, despite the fact that a return of a non-excess contribution to an IRA is permitted.

The code 81 Form 1099-R is for the return of your original contribution and, since the gross amount is equal to the contribution amount being returned, implies that there was no gain or loss attributable to the contribution that was returned.  I'm not sure why you would have received a separate code 1 Form 1099-R.  Perhaps the custodian botched the original gain calculation and subsequently distributed $69 of gain attributable to the $5,500 that was returned.  That doesn't change the taxable amount; the $69 is taxable and subject to penalty either way.  However, with the gain reported on a separate code 1 Form 1099-R it ends up looking like a distribution that is eligible for rollover when it actually was not (which doesn't really matter as long as you did not roll it over).

To correct the problem on Form 8606, I would simply omit reporting the $5,500 traditional IRA contribution entirely by going back through the traditional IRA contribution section and deleting the $5,500 originally entered.  You'll still need to enter the two Forms 1099-R.  You'll also need to provide an explanation statement for the return of contribution, but it seems that TurboTax does not prompt you to prepare one under these circumstances, so you'll probably need to prepare the explanation statement manually and include it with your mailed tax return.