It is a bug. I am unable to reproduce the problem in CTP 5 of VS 2015, and I think this one should have been fixed as part of the Roslyn rewrite. However, a commenter below notes that they can reproduce it in CTP 6. So I’m not sure what is going on here as far as whether this bug has been fixed or not.
On a personal note: I do not specifically recall if I was tasked with looking into this one when it was first reported back in 2010 but since I did quite a bit of work on the circularity detectors around then, odds are pretty good.
This is far from the only bug there was in the circularity detectors; it would get quite confused if there were nested generic types which in turn had generic base types whose type arguments involved the nested types.
I am not at all surprised that Alex “won’t fix”ed this one; I spent quite a long time rewriting the code that did class circularity detection and the change was deemed too risky. All that work was punted to Roslyn.
If you’re interested to see how the Color Color binding code works in Roslyn, take a look at the aptly-named method BindLeftOfPotentialColorColorMemberAccess — I love me some descriptive method names — in Binder_Expressions.cs.