I had absolutely no idea this was possible, but iTunes smart playlists can have nested rules (Mac OS X Hints). I tried it, and it works. Option click the icon for adding rules and you get nested rules.
Unfortunately based on comments we learn that iCloud Match can barely support smart playlists at all and that nested playlists don't always work with iOS. So in general it's safer to build playlists atop playlists rather than use nesting, but it's so cool Apple once did this.
Alas I expect Apple to lobotomize iTunes with version 11 to match iCloud's limited capabilities. Until then, cool feature.
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