Cosmetic modding, eg: Case mods, are perfectly legal.
Internal modding, eg: Removal of Microsoft's OS, replacement of internal hardware, bypassing DRM to play "backed up games" or pirated games, is in violation of Microsoft's Terms of Service. No, you won't necessarily go to jail, but you will get banned from xbox live if Microsoft catches you online with a modded 360.
"Content that promotes, encourages, or provides instructional information about illegal activities - specifically hacking, cracking, or phreaking."
"Any material that violates or infringes in any way upon the proprietary rights of others, including, without limitation, copyright or trademark rights"