I noted this today while trying to create a larger than normal item.
When the item is supposed to be held up, it disregards previous instructions to change it's size (such as Extend, item->TileWidth and Item->Tileheight) and just uses whatever tile was set in the item editor.
In fact, I had to make a script that set the item's size every frame just to make it appear large at all.
In the end, I decided to fake the item pickup by using drawn tiles and making Link temporarily invisible. I can upload a test quest with the item and scripts set up if anyone wants to see what's happening.