iSeries Linked-Server SQL 2012 performance issue
Community Wiki answer originally left as a comment by the question author

Resolution: I unchecked “Automatically set processor affinity mask for all processors” and checked the individual CPUs.  I had also already changed the MaxDOP =  0 (it was even faster than 1 or 3).   

Results are blazing fast!  So the bug must be that the "Automatically set processor affinity mask for all processors" box does not actually use all the CPUs, it must only see one of them.  Manually selecting all the CPUs is required.  This was true for both the 2008 R2 and 2012 servers.