[The state tax collection agency] correctly maintains that courts distinguishing between taxes and penalties in the bankruptcy context should look to the actual operation of the provision in question; indeed, the Supreme Court recently reaffirmed this principle. [Citations omitted]. Therefore, to determine whether [the taxing agency's] assessments are noncompensatory penalties, we look behind the statutory label ("penalty") and examine the "actual effects" of the assessments. [Citation omitted]. The Supreme Court summarized this functional analysis as follows: 'A tax is an enforced contribution to provide for the support of government; a penalty, as the word is here used, is an exaction imposed by statute for an unlawful act.'

State of Washington v. Hovan, Inc. (In re Hovan, Inc.), 96 F.3d 1254, 1257 (9th Cir. 1996), quoting United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213 (1996). If the assessment "has no direct relation to any specific costs incurred by the state," its "actual effect" is generally punitive and not compensatory in effect. Hovan, 96 F.3d at 1257.

In this case, the "actual effect" of the redemption penalties at issue is to punish a delinquent taxpayer, rather than to compensate the Tax Collector for actual losses. The penalty is imposed at a flat rate of 18 percent per year, and bears no "direct relation to any specific costs incurred" by the Tax Collector. Id. Moreover, section 4103 does not refer to specific costs which are to be compensated by the penalty; rather, the California Revenue and Taxation Code contains two other provisions authorizing the assessment of delinquent costs, thereby compensating the Tax Collector for costs associated with the delinquency. See Cal. Rev. & Tax. Code §§ 2657 and 3351. Finally, the California Supreme Court has also recognized the true purpose of section 4103: "the statutory scheme, when considered as a whole, clearly indicates that redemption penalties are merely what the name implies -- charges for the exercise of the privilege of redeeming sold property." Weston Investment Co. v. State of California, 31 Cal.2d 390, 394, 189 P.2d 262, 264 (Cal. 1948). Because the "redemption penalties" were correctly designated as such and are punitive in nature, they must be accorded fourth priority under 11 U.S.C. § 726(a)(4).

(4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary. Or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim.