xsd.exe fails to handle circular group references by Wuzi

This schema is valid and often published by the industry, yet it XSD.exe gives an error trying to parse it.

<?xml version="1.0" encoding="utf-8"?>
<xs:schema attributeFormDefault="unqualified" elementFormDefault="qualified"
xmlns:xs="http://www.w3.org/2001/XMLSchema"
targetNamespace="http://test" xmlns:t="http://test">

<xs:element name="elem1">
    <xs:complexType>
     <xs:group ref="t:grp1" />
    </xs:complexType>
</xs:element>

<xs:group name="grp1">
    <xs:sequence>
     <xs:group ref="t:grp2" />
    </xs:sequence>
</xs:group>

<xs:group name="grp2">
    <xs:sequence>
     <xs:element minOccurs="0" name="elem2">
        <xs:complexType>
         <xs:group ref="t:grp1" />
        </xs:complexType>
     </xs:element>
    </xs:sequence>
</xs:group>
</xs:schema>


To run:

>"c:\Program Files (x86)\Microsoft SDKs\Windows\v7.0A\Bin\NETFX 4.0 Tools\x64\xsd.exe" tmp.xsd /c
Microsoft (R) Xml Schemas/DataTypes support utility
[Microsoft (R) .NET Framework, Version 4.0.30319.1]
Copyright (C) Microsoft Corporation. All rights reserved.
Error: Error generating classes for schema 'tmp'.
- Group 'grp2' from targetNamespace='http://test' has invalid definition: Circular group reference.

Issue #229705 was the original bug, and #624987 was an ignored attempt to reopen it. This is a critical functionality broken in the schema parsing classes, and has a high vote count.