I have the following XSD which was generated by VS from an example XML file:
It sounds as if your use case is very like some of the motivating cases for xsi:nil. From your description, it sounds as if you made the element nillable, but then fed it an non-nilled instance of the form
instead of specifying that the element should be nilled:
If you want to modify the type, the methods described by kjhughes and Michael Kay should work fine.