Is this correct: Get the apple, in the basket, that is red.

[Casiopea]

Sorry Casiopea, 'wrapped' can be a verb; see dictionary.com.

He wrapped the apple. (Verb, past tense)
He gave me a wrapped apple (Adjective, past participle) :wink:

Note,

Give me, wrapped (i.e. it is to be wrapped), the apple in the basket. (past participle, not a verb)

[Casiopea]

I would greatly appreciate it if anyone gives a source of the rule by which that must modify the nearest noun.

Look up local binding in Chomsky (1982) Government and Binding Theory.

Note, Binding principles delimit the relative positioning of anaphors and their admissible antecedents.