I believe xml was chosen because it was the most convenient they had, and it allowed you to sort the data in whatever manner you wanted while being one of the most well known formats to do so. Again, xml isn't a music notation format, but a data format, and what LMMS produced as an output was something xml was ideal for given how it works. It was capable of containing not only track notes, but instrument properties, automation track fine-tuning controls, FX properties etc, all in a format where a human could (albeit barely) look through it and understand some part of what was going on.
As for valid xml tags, I don't think there is a datasheet anywhere. One's best bet would be to look through a .mmp (not .mmpz, those have gibberish) and see what it contains.