Just figured this out to some degree. If you code:

if object_id('tempdb.dbo.#tmp') is not null drop table dbo.#tmp;

create table dbo.#tmp(x xml);

insert dbo.#tmp

select 1 [Number] for xml path('root')

it will fail with Msg 6819, however, the following will work!?!

if object_id('tempdb.dbo.#tmp') is not null drop table dbo.#tmp;

create table dbo.#tmp(x xml);

insert dbo.#tmp

select (select 1 [Number] for xml path('root'))