Following up as I was able to successfully appease the IRS in a way that left me with no Tax liability. As previously stated I followed the guidance at the beginning of this thread and the IRS shot that down, saying I should have reported it as ordinary income. After providing them information showing the payment was for an easement, I was instructed that I had to reflect it as a capital gains transaction on form 8949 and Schedule D. So listed it as a sale of property in the long-term section, and I made the cost basis equal to the proceeds resulting in a zero net gain. Per IRS Publication 544, If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. I included this statement in my response for why I used this cost basis. The IRS accepted this response / adjustment and relieved me of my proposed balance due.
