I think I figured out my problem.

The E46 chassis has the transmission options listed in the SA bits for the coding, but on the E53 they are held in the GM bits. I also confirmed this by looking at the E53ZST file which contains the information of these options, as seen in my picture below.

It was then that I needed to subtract "8" on the GM bit of the 7th digit to get the standard transmission and not "AUTOMATIK" for the proper coding.

NOW, the KMBI (cluster) will expect the reverse light request to come from the standard transmission reverse light switch and NOT the EGS module. Therefore, the KBMI will then send the request to the LCS to activate the reverse lights because now it sees the proper request via standard transmission. In addition, I confirmed this via INPA by reading the codes from the cluster and found the EGS1 no CAN fault now cleared!

Attached Images

 

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2003 BMW X5 3.0i -- MT5, 3.64s final gears, H&R lowering springs, K-Mac bushing kit
2007 BMW X3 3.0Si -- MT6