OK, I SOOORRT of see it now. I tried your test, Dune, and I can see how easy it is to apply to a terrain. As far as I could tell, Near Distance is the distance from the camera that the Near Color appears solid and uniform all the way back to the camera. Conversely, Far Distance is the starting distance at range, beyond which the Far Color appears solid and uniform out to the farthest distance possible in the TG2 universe. Between these two distances is the transition zone where the two colors transition from one to the other. It APPEARS that if I turn off "Apply Far Color", for instance, the distance shader is still applying the algorithm to the far area, but since the color is turned off, the far area is transparent (masked out). Therefore, the gradient shades from a solid near color below the near distance, then fades to 100% transparency at the far distance. From there out to infinity, 100% transparency persists.
But...when I try to apply this to a cloud layer, I get strange results. Please see the attached tgd file. I applied yellow as a far color, green as a near color, yet my clouds don't render at all except for a red (!?) area down at the bottom right. I have tried placing the distance shader node at different points in the network to no avail.