I'm not familiar with CA rules. That said, two things:
1. If the income was correctly reported on line 8r of federal schedule 1, and CA FTB is saying it's not earned income, there's a good chance that that is their position. On the other hand, this is the first time this has come up, in this forum, to my knowledge.
2. You may want to post a fresh question, in the "state" section (rather than "education") to get more CA "eyes on" on your problem.
I have notified TT of your situation.
