Crossroad,
As to the "why"....beyond it being the specified display in that manner...I have no clue as to why. Over the years I have always found that particular situation a bit confusing. I will keep looking for the pukka gen on that.
As to retiring a flag....burning in a reverent and dignified manner is the approved method. Veterans groups, fraternal orders like the Elks and such, Boy Scout and Girl Scout groups often times offer this service.
My American Legion post maintains a "Flag Drop" for public use and periodically we will have a Flag Retirement Ceremony and retire the flags left there. It is not unusual to visit Schools and other Youth Organizations and have the kids participate in the ceremony.
Here's a link that has the rules regarding display and respect for the flag.
http://www.ushistory.org/betsy/flagetiq.html#1