I actually found that the nested folders are part of a corrupt mail preferences file [user home]/Library/Preferences/com.apple.mail.plist.

I rectified the issue by first quitting Mail.

Then, using the Propertly List Editor (Apple Developer tools required) I "dump"ed the XML and copying/pasted that XML into a text editor.

Then, I searched for INBOX. After a few searches, I finally came across a property for "ToDosMailboxName" (search for this instead of INBOX, you'll get there quicker) where the value was all of the nested INBOXES.

Then, I went back into the Property List Editor, found the element (using the XML path) and replaced the INBOXES with the correct "Apple Mail To Do".

Problem solved (for me at least ;)

If the Apple Developer Tools aren't installed, the only way to fix it is to delete the preferences file and add all of your mailbox accounts again.

Oh, FWIW, com.apple.mail.plist is stored in binary format so you can't simply modify it with a text editor. You have to use the Property List Editor.

Actually binary plist files can be converted from binary to text, and viccy vacca, with the command line plutil.

TextWrangler also opens them directly, translating on the fly.

Cheers