In the setup in question, D goes into an infinite loop (since in the general case it must call a copy of C, but because the box is transparent, C takes as input the output of D).

No, because by stipulation here, D only simulates the hypothetical case in which the box contains $1M, which does not necessarily correspond to the output of D (see my earlier reply to JGWeissman:

http://lesswrong.com/lw/1qo/a_problem_with_timeless_decision_theory_tdt/1kpk).