I dont know to much about instance but from what I have experimented with...the instance is an entity on its own...so techinally you have 2 objects so to speak. So when you smooth...although they appear attached (1 mesh) they arent...so Maya will pull it out as 2 meshes. I do it the long way....combine...merge verts then smooth....then back to smooth 1 and delete the half..then copy again...or just CTRL Z. Maybe some one else knows how to smooth them as they are. Sorry I couldnt be more help mate.

Cheers bullet