Then it looks like an easement (provided the partners did not deed the entire piece of land, outright) and you adjust the basis of the property. No gain unless proceeds exceed basis, and no income. You might want to attach an explanation, at least for the benefit of future generations -- I doubt that IRS does any document matching with 1065's. The question might be whether the easement involves the entire parcel, or just a part of it. In other words, if there are 40 acres, and this restricts use of only one of them, then only 1/40 of the basis would be reduced (and it might turn out to be a capital gain).