I think I could reproduce the problem. Using a project area created with Formal Project Management template, the "Rejected" state is associated to "Open" state group for "Milestone" work item type. After I changed the associated state group from "Open" to "Closed", I could reproduce your issue.
Then I tried to remove the "Rejected" state and re-create a new "Rejected" state with the same setting, the problem seems resolved.
I don't know what the cause is. If you need a root cause, I suggest you contact IBM Support.