Is there a reason you used a multipoint ATM sub-interface on ATM3/0.12 on R1?
Could you have also used a pt-to-pt?
I found the answer to my own question. ISIS will not form a neighbor relationship between a point-to-point interface and a multi-point interface. The ATM physical interface is seen as a multi-point interface, therefore the subinterface on R1 needs to be multipoint.