The credit goes to @Fen Han who provided the answer in the comments.

For those looking for the MS documentation that describes Visual Studio file nesting options, the link is: https://learn.microsoft.com/en-us/visualstudio/ide/file-nesting-solution-explorer?view=vs-2022

Note that the above link deals with file nesting in the IDE only. web.config transformations still have to be handled depending on the project type.

Thanks again.