For flat towing, the T-case must be in neutral, but the transmission must be in Park (automatic) or in gear (manual) during towing.
The T-case oil pump is driven from the output shaft of the T-case, so flat towing will turn the driveshafts and the oil pump providing T-case lubrication. So that's all good news.
However, not so for the tranny. Even with the T-case in neutral, the viscous nature of the lube in the T-case will spin the T-case input shaft, which will in turn spin the output shaft of the tranny if it is left in neutral. This is where the trouble starts. The transmission will not lubricate the bearings if the tranny input shaft is not turning, so the bearings will starve for lube. Placing the transmission in gear (any gear) will prevent all of this from happening.
Hope this helps give you a better understanding.
I dug out my '91 Owner's Manual and quoted the following verbatim.
Page 125 of the 1991 Jeep Wrangler Owner's Manual states;
1. Shift transfer case to 2H and check that the 4WD light goes out.
2. Drive vehicle 10 ft. (3 m) rearward and then 10 ft. (3 m) forward to make sure the axle is disengaged.
3. Shift transmission to Neutral.
4. Turn off engine with the ignition key in the unlocked OFF position.
(NOT in the "LOCK" position, the steering wheel must be able to turn while flat towing!)
5. Shift transfer case lever from 2H to N (Neutral) position.
6. Shift manual transmission into gear or automatic transmission into P (Park).
WARNING: With the transfer case in N (Neutral) position, the vehicle could roll unexpectedly. The parking brake should always be applied before the tow bar is attached.
7. Attach vehicle to the tow vehicle with tow bar.