First, your XML is not valid. You can only assign values to attributes and you are trying to assign them to the tag.

<TOP_LEVEL_ITEM= "TOP LEVEL TYPE A" TOP_LEVEL_ID="294">

This needs to be changed to something like

<TOP_LEVEL_ITEM name= "TOP LEVEL TYPE A" TOP_LEVEL_ID="294">

Second, your data doesn't match the expected results. For instance, you results has id 2223 under 294/1244/1245, but you data has it under 294/1252/1245.

That being said, the most efficient way is probably to use FOR XML EXPLICIT, but most people find that too confusing. Any other method will have to access the table multiple times in order to create the requisite structure.

SELECT DISTINCT Tag, Parent

,t.[TOP_LEVEL_ITEM!1!name], t.[TOP_LEVEL_ITEM!1!id]

,t.[SECOND_LEVEL_ITEM!2!name], t.[SECOND_LEVEL_ITEM!2!id]

,t.[THIRD_LEVEL_ITEM!3!name], t.[THIRD_LEVEL_ITEM!3!id]

,t.[FOURTH_LEVEL_ITEM!4!name], t.[FOURTH_LEVEL_ITEM!4!id]

FROM #TABLE_XML1

OUTER APPLY (

SELECT 1 AS Tag, NULL AS PARENT

,TOP_LEVEL_ITEM AS [TOP_LEVEL_ITEM!1!name], TOP_LEVEL_ID AS [TOP_LEVEL_ITEM!1!id]

,NULL AS [SECOND_LEVEL_ITEM!2!name], NULL AS [SECOND_LEVEL_ITEM!2!id]

,NULL AS [THIRD_LEVEL_ITEM!3!name], NULL AS [THIRD_LEVEL_ITEM!3!id]

,NULL AS [FOURTH_LEVEL_ITEM!4!name], NULL AS [FOURTH_LEVEL_ITEM!4!id]

UNION

SELECT 2, 1

,NULL, TOP_LEVEL_ID

,SECOND_LEVEL_ITEM, SECOND_LEVEL_ID

,NULL, NULL

,NULL, NULL

UNION

SELECT 3, 2

,NULL, TOP_LEVEL_ID

,NULL, SECOND_LEVEL_ID

,THIRD_LEVEL_ITEM, THIRD_LEVEL_ID

,NULL, NULL

WHERE THIRD_LEVEL_ID IS NOT NULL

UNION

SELECT 4, 3

,NULL, TOP_LEVEL_ID

,NULL, SECOND_LEVEL_ID

,NULL, THIRD_LEVEL_ID

,FOURTH_LEVEL_ITEM, FOURTH_LEVEL_ID

WHERE FOURTH_LEVEL_ID IS NOT NULL

) AS t

ORDER BY t.[TOP_LEVEL_ITEM!1!id], t.[SECOND_LEVEL_ITEM!2!id], t.[THIRD_LEVEL_ITEM!3!id], t.[FOURTH_LEVEL_ITEM!4!id]

FOR XML EXPLICIT

Drew