FYI, @BobKamman 's original post cited KCRA3, which is a Sacramento station.   

I simply treat MCTR as a tax refund.  If the FTB had sent out 1099-G's (like some other states), there wouldn't be this gusty wind in the tax teacup.  

The practical matter is this: IF the IRS doesn't specially mark the FTB 1099-MISC's and instead simply put them in the pool of 1099-MISC and follows up, it could trip up inquiries or some form of audit letters for SOME CA taxpayers.

As a practical matter, I'm not waiting for IRS clarification.  In Lacerte, even if we enter the amount and back it out, Sch 1 would NOT be generated anyway - that is, unless there's another Sch 1 item.  

I know my clients.  A few of them would rather pay tax on it instead of taking ANY risk because they have to breathe into a bag when they have to open ANY IRS letter.  When they do get a letter out of the 1099-MISC and bring it to my attention, they have to breathe into a bag when they write me a check to resolve a non-problem.  For those, I let them decide.  For myself and clients who have written off the state income tax, I'd enter it as taxable.  Fair is fair.  For most others, I just enter the amount and back it out for a NON-GENERATED Sch  1 in my record.  

Then, until the gusty wind dies down, I use the tax teacup for my daily regimen of bourbon.