Why are regular Folders in Smart Folders not showing up in Open File dialogs? I'd like to create Smart Folders in the Finder favorite bars that I can access from different applications. Those Smart Folders will mostly contain regular folders of current projects I'm working on. 

The regular folders show up correctly in the Finder Favorites sidebar, and if using an application (say, Keynote), in the Save dialog. However if I want to open a keynote file that is located in 

/Smart Folder/RegularFolder


/RegularFolder does not show up in the Smart Folder when accessed through the Open File dialog. 

The same thing occurs if I tag a folder and then try to navigate to that folder from the open file dialog to the Tags sidebar.

Is this the expected behavior? Am I missing something?
This is indeed the expected behavior, as explained in this article by Howard Oakley. The article deals with tagged folders, but the behavior also applies to Smart Folders.