Google Reader has had a function that allows users to assign "tags" to individual items in your feeds. Separately, you could put an entire feed (i.e., a source you subscribed to) into a folder. When you used a folder, Google Reader then "tagged" every post in that feed with the name of the folder it was in. Here's a Google Help post that explains how folders and tags worked.
When you migrate to Digg Reader, we can pull in only those tags that are not also folder names. Why? Every item that comes into a folder is automatically tagged with a tag of that folder's name. It's impossible for us to tell whether the tags are manually added by the user or automatically added by the folder.
So we pull in folders as folders and tags as tags. We pull in 1,000 items per tag.