Did you actually sell the land, so that your lot is officially smaller as recorded at the county clerk’s office? Or did you give the utility an easement (that will be recorded as part of the property but your lot dimensions are the same)?
SHOULD I CLAIM THIS AS INCOME?
It depends. Maybe. Maybe not.
Did you sell the land to the state so that your property line as recorded as your county property tax assessor's office reflects that you no longer own that part of your property? (thus reducing the amount of property you are paying property taxes on.)
Or does your property line remain unchanged and therefore you continue to pay property taxes on that land you gave/sold the state right-of-way to?
This matters, espeically of the right of way is so the state can widen the street in front of your house.
In all likelihood, the money is not taxable income, but the 1099 – S form will have to be dealt with one way or the other, or else the tax payer will probably get a compliance letter from the IRS.