1. When triggered the macro looks backwards from

the cursor position for lines beginning with four tabs?

Yes. Specifically, four tabs followed by a letter, number or punctuation mark.

2. The first such line is skipped and the second such

line inserted where the cursor is.

Two lines down from where the cursor is, yes.

What is supposed to happen if there is only one such line in the document. (I know it crashes, but what is it suppose to do?)

Just insert the cursor in the expected position (two lines down and four tabs in) with no text.