Correct. With a proper, explicit return of contribution, only investment gains that are attributable to the excess contribution that are required to accompany the returned contribution are taxable. If at the time of this distribution value of the account is less than or equal to what it was immediately following the deposit of the excess contribution, there will be no taxable gains to distribute. The returned contribution itself is not taxed.
Given the bad information from Vanguard that suggests inadequate training, make sure that they process a return of contribution that will be coded with code 8, not a regular distribution coded with code 1 or code 7.
