The weirdest case of this I've ever seen was one that posited dwarves and elves as being the same race. Despite their apparent differences, they were really just the two genders of one common species. Dwarves were the males, and elves the females.
In this setup, humans didn't realize the truth about the races because they only judged by outward appearance. The species did have varying body types, but that had nothing to do with gender. (For instance, if a dwarf had breasts and no beard, a human might incorrectly assume he was female, but he would actually be male in terms of... er, primary characteristics.) They didn't get offended when humans referred to them using incorrect pronouns, because their own languages had a complex set of gender indicators that could not translate into Common at all.
Any dwarf was able to mate with any elf, and produce offspring. The "race" and apparent gender of the child were both random, like gender in humans. There was a bias toward more dwarves, which kept the population balanced even though elves lived longer. Mated pairs did not form long-term bonds; once the child was weaned they separated, and the child stayed with the parent of its same "race."
If I could remember who came up with this idea I'd give credit. Unfortunately it's not in my notes anywhere, and a few minutes of Google hasn't found a source.