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When the "Fake ceiling and floor heights will always be used" flag is active and the real sector's ceiling is below the fake floor, objects never get drawn, so monsters, items, projectiles, decorations, etc. all become invisible. Also, the fake sector's properties are never used when the ceiling goes beneath the fake floor, so things like coloring and fade don't apply to the sector even though, at least I think, they should be applied in those situations.

I think this is a clear case of 'Don't do that'! The fake sector stuff is a hack and abusing it will create odd results - as here. If you think about the way this special works I'd say the observed results are as expected.

By "fake ceiling and floor heights will always be used", do you mean flag 1? It doesn't exist anymore, because it never worked as intended.