When I do the following (Inkscape 0.48.4 r9939):

1. Create two layers: Layer 1 and Layer 2;
2. Draw the box in each layer;
3. Change visibility of Layer 1 or 2 - works perfectly;
4. Group the boxes, then ungroup immediately;
5. Change visibility of bottom layer - nothing happens.
(You may also check the video: http://youtu.be/5SQQUBOfiqg).

It seems that after grouping all objects moves into the top layer. Why? What am I doing wrong?

Is it possible to keep layers functioning properly when grouping/ungrouping objects?

Hello:
Groups and layers always have been working on that way (I 'm 80% sure , in which version that feature is NOT broken? ). You can't group or ungroup objects from different layers, and expect it will remain in each layer.
Because:
The SVG format doesn't have support for layers. Inkscape uses svg-groups as layers, adding them an special tag. You can use the XML editor (Ctrl+Shift+X) to see what I mean.

I don't know for sure, but maybe the layers feature in Illustrator, or Corel draw, has a differente behaviour, and you are confusing Inkscape with them.

Ponyscape, which it's a special fork of Inkscape, have better tools, in my opinion, for managing layers and groups.

But, still, I HATE all that invasion of MLP characters's artwork on deviantART