Thanks for your comment. I was reviewing this situation today, and saw that I could avoid the 10% penalty tax if the reason was the qualified expenses were used for the AOC. The software seemed to calculate and divide the amount of earnings between the two lines, one amount for tax fee scholarships and the other for the AOC on the 5329 form. 

I had tried to enter on the 99-Q form the amount used for the AOC, but it kept disappearing. I guess you enter that on the form 5329 in the smart box. However, it looked like the software was making a calculation, so I just decided to rely on it.

I saw at the bottom of the page where on the form were adjusted qualified expenses are figured where you enter the amount for the expense applied to the 529 plan for income tax and the 10% penalty. I put zero in the tax column and the software did put a figure in the 10% column, so I just thought it knew what it was doing. I will go back and check again.