In my original post I asked if we could limit the discussion to "how-to", and leave "whether-to" aside.
However, IRS Pub 550, page 14 says: "When you buy a market discount bond, you can choose to accrue the market discount over the period you own the bond and include it in your income currently as interest income."
In California the taxing authority is, as far as can be detected, completely silent on the issue. So we go ahead and treat it as non-taxable Treasury interest and if the FTB doesn't like it we'll deal with it later. California has a form "CA" where you make adjustments to your Fed interest declarations. That seems like the place to back it out.
