Frank,
One quick question: can the nested lists themselves have nested lists? I
gather from the way nested lists are handled in the source that they
cannot, or is there a separate type of @pgftag for each level of such a
structure? (First level = Bulleted text, Second Level = Bullet Sub, etc.)

Regardless of the above, a first step in trying to do this with a
for-each-group would be to use the group-starting-with attribute:

<xsl:for-each-group select="para"
group-starting-with="para[@pgftag=('Chapter','Body Text')]">