The school wants to work with us. What suggestions can you make about a bright boy who can achieve more but is staying where he is because he is comfortable? I'm afraid that in being comfortable he will later become bored.
A little guy like him should be able to spend class time with age mates for his social development. Gifted children often have what is known as "asynchronous development." They may be very advanced in one area -- like academics -- but socially be just seven years old. He certainly figured out quickly how to get back to second grade!
Your son will get too comfortable eventually if he is not sufficiently challenged. He should be encouraged to work at his level, no matter what grade he's in -- but that will take some adaptation in his curriculum. There are many publications geared towards teachers with kids of varying abilities in one class. I would recommend the book Teaching Young Gifted Children in the Regular Classroom by J. Smutney et. al., to his teachers for some practical suggestions. Also, offer to help in some way with time or materials to make their job easier. Locate challenging extracurriculars that would be fun for him -- museum classes, a chess or Scrabble club, etc. Your son may be ready to skip ahead at a later date if he stays in the "learning habit" now. Good luck.