Originally Posted by Luv70sFords
The owners manual is referring to the transmission being in neutral, not the transfer case. With an automatic, you want to be in park. The park pawl holds the output shaft of the transmission still. In neutral there is enough drag from the oil on the clutches to make the gears spin. This is what causes the gear clash at the transfer case.
Correct, when towing, auto transmission is in Park, manual trans in any gear. When taking transfer case in or out of neutral, transmission should be in Neutral (auto or manual), per manual. Don't think this was OPs question?
Engine running while stationary and trans in neutral, if you try to shift Tcase out of neutral you will grind gears, per manual, engine off during this operation.