I'm quite sure, that the GT120 would work with macOS Sierra, because a Mac Pro 2009 is compatible with Sierra and the GT120 was the standard GPU of the Mac Pro 2009, but I'm not sure, yet, if the Xserve itself would be compatible with Sierra.
In regard to OS X 10.8.x to 10.11.x the Xserve 2008 (2,1) is not really a problem, because the Mac Pro 2008 (3,1) was officially supported by these OS versions and the Xserve 2,1 - related to its internal components - is more or less a Mac Pro 3,1 in 19" form factor. The only problem of the Xserve 2,1 is its X1300 graphics card.
So you can run 10.8.x to 10.11.x on the Xserve 2,1, if you replace the GPU (as mentioned before) and patch or rename the /S/L/CoreServices/PlatformSupport.plist file.
The problem with Sierra is, that AFAIK in relation to Mac Pro the min. requirement is a Mac Pro 2009 (4,1). So what might happen here, is, that some drivers required for the internal hardware of the Xserve 2,1 are no longer part of Sierra and so you might run into trouble.
I did not test this, yet, but perhaps some other user here already tested this.