I don't think the utility rep was lying to you. I think it's most likely he doesn't have a clue, and was saying whatever was required to just make you go away. Besides, I would not expect a utility rep to have the first clue anyway, when it comes to tax treatment of any payments made to you by the company/business they work for.
Basically, I have no doubt that at least the 20% is taxable income for "renting" that land from you. More than likely though, instead of reporting it as rental income on SCH E, you may be able to just report it as "other income" so you don't have to deal with all that SCH E stuff for just a one time payment.
The remaining 80% may or may not be taxable. If whatever permanent changes they make to the land decrease the value of the land, then you would have "in essense" sold a portion of, or something on that land (such as the trees they cut down) to them. More than likely the compensation amount for that would not be taxable. But you would be required to reduce your cost basis in the property by the amount of compensation received for those permanent changes to the property. That would not come into play however, until you either sold the property, or converted it to some type of business use. I doubt you would do the latter with vacant land. But there are scenarios where it could very well be possible.
