Check the Audio/Video settings in ATV3 and check the iTunes Store settings in ATV3. Both should be for 1080p. But as you discovered, you should make sure your equipment also supports 1080p. AppleTV3 can't display 1080p when your equipment doesn't support it.
To the original poster, you discovered that your receiver only supports 720p through HDMI. Time to buy a new receiver if you want the receiver to handle the HDMI.
To koacub, if your old Sony XBR1 only supports 720p or 1080i, why did you buy an ATV3? You discovered that your HDMI switcher only supports 720p as well. This is not Apple's issue when you don't have the proper equipment. The ATV3 fully supports 720p, and under Audio/Video, you can set the video to automatically detect the maximum resolution supported for your TV. Apple never dropped 720p, it is still an available option for those that don't have a 1080p HDTV. Don't complain about the ATV3 when you don't have the AV gear to support it.