When you receive a Form 1099-DIV that has an amount for Box 3, Nondividend Distributions, you may be wondering where to report it.
IRS Publication 550, page 21 states that a nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation. The nondividend distribution reduces the basis of stock and is not taxed until the taxpayer's basis in the stock is fully recovered. Thus nontaxable portion is return of capital and is nontaxable. When the basis of the stock has been reduced to zero, report any additional nondividend distribution received as a capital gain.
For additional information see IRS Publication 550.