hatsybatsy I do get why you're puzzled, but not why you feel it leaves a bad taste.
I was trying to think of other similar scenarios, imagine for example:
You are a lifelong leftie/socialist type, FIL gives you a checque with the caveat that he doesn't want you to donate it to the Tory party.
Or
You are a vegetarian, he gives you a cheque and asks that you don't spend it on foie gras.
Or
You are a supporter Fair Trade and Social Responsibility, FIL gives you a cheque and asks that you don't spend it on products from[insert socially irresponsible company here].
Or
You are an immigrant from [insert appropriate country here], he gives you a cheque and asks you don't spend it on contributions to the BNP.
In all of those situations, you don't want to anyway, so why is this a big deal? FIL doesn't have a 'right' to dictate your politics/religion/what you eat or where you shop, but he does have a right to say how he would like his money to be spent.
In our situ, it is more likely in the future that FIL might wish/try to fund a catholic education for our kids. In that case, I would just say, thanks, we've looked at the options and don't feel it's right for us and DC at the mo so thanks but it doesn't seem fair to accept your gift.
I really don't think it is controlling or objectionable for gifts to be made in this way. It is your right to decide how your kids are educated, but it is just as much his right to stipulate how his money is spent. Nobody is controlling anybody else.
FWIW, anybody who has ever given a gift of vouchers is dictating to some extent how the recipient spends the money, in that the vouchers are for one store, perhaps just clothes, or CDs etc. Even if a department store, you're still dictating that they don't spend it in another department store. I don't think it's all that different, just on a larger scale.
D