Converting flattened hierarchical data from SQL Server into a structured JSON object with C#/Linq

EDIT: I don't have time to fix the answer below right now, but given the extra information in the question, I suspect you want to keep a Dictionary<int, HierarchicalNode> rather than a List<HierarchicalNode> so that you're not relying on any ordering...

I would forget about the JSON representation to start with, and concentrate on building an in-memory POCO representation of the hierarchy. To do that, I'd use something like this:

class HierarchicalNode
{
    private readonly List<HierarchicalNode> children =
        new List<HierarchicalNode>();        
    public List<HierarchicalNode> Children { get { return children; } }

    private readonly string name;
    public string Name { get { return name; } }

    private readonly int id;
    public int Id { get { return id; } }

    public HierarchicalNode(string name, int id)
    {
        this.name = name;
        this.id = id;
    }
}

Then build up the tree like this:

// Make sure we get everything in a sensible order, parents before children
var query = context.Nodes.OrderBy(x => x.Depth);

var root = new HierarchicalNode("Root", 0);
foreach (var node in query)
{       
    var current = root;
    foreach (string part = node.HierarchyPath.Split(new[] {'/'},
                                   StringSplitOptions.RemoveEmptyEntries))
    {
        int parsedPart = int.Parse(part);
        current = current.Children[parsedPart - 1];
    }
    current.Children.Add(new HierarchicalNode(node.Name, node.Id));
}