This menu item has the following behaviour: - When the pref browser.tabs.autoHide is set to true, it is always greyed out. - When it is set to false, it is greyed out when more than one tab is open. So it turns out that this menu item has the functionality to optionally hide the tab bar, when you have set the pref to hide it automatically to false and only have one tab open. This way Show/Hide|Tab Bar is almost always greyed out. It is not obvious to the user in which situation he can actually use it, thus confusing him. It is a menu item that can be permanently disabled via a pref, which is kind of strange. All in all this menu item is an example for badly designed UI and should just be removed. The option to alway show or hide the tab bar in the Preferences is enough.
IIRC it was added when the X was made clickable when only one tab was open, as a means of undoing the forced hide.
When bug 156082 is fixed (one way or the other) this menu item seems totally useless and should be removed.