There appears to be an incompatibility with the MS OleDB for ODBC driver method of creating linked servers and SQL 2008 R2. This method works with a SQL 2005 server.
A phone call to IBM support (see info below) and numerous tests and IBM review of odbc/ibm logs revealed odd handling of the odbc requests from SQL 2008 R2. This method still works on SQL 2005, which somewhat confirms an issue with SQL 2008 R2. Per IBM support another client recently reported SQL 2008 worked, R2 broke the functionality.