I think if you don't report it your client will receive a notice for reporting deficiency when IRS system doesn't find the income on the return.  (Can't match)

At that point you could send back stating that you don't think this is income and explain where it came from.

However, if you do that I think that IRS then looks to the company and we get to the question you have asked, "what expense was reported".

Based on the way the 1099 Misc is completed with box 3 I think that other income is appropriate.

These are the things that make our hair turn grey!

Seems fishy!  But do we know that?  

If we just report what the form says and assume it is correct are we immune from responsibility if this is wrong?

What structure does the business report using?  Is it possible this should be dividend?  Lots of questions not really any answers as your client is the recipient.  Depending on what the client knows I think you have to make a decision to report or hand it back to the client and have them ask questions knowing the answer he may get is "Just report it!"