Bull. This is just another arbitrary limitation by Apple. I know for a fact that the 4s will play 1080p up to High Profile level 4.1. This is even stated on Apple's Tech Specs.
I have LOTR Bluray rips at 1080p, High Profile level 4. When I imported them to iTunes with the old HD tag to denote 720p it played fine on the 4S. However, when I used the new Subler version to put the 1080p HD tag on the same file, it wouldn't show up on the iPhone through Home Sharing. Quite stupid if you ask me.
EDIT: Apple's Tech Specs:
Video formats supported: H.264 video up to 1080p, 30 frames per second, High Profile level 4.1 with AAC-LC audio up to 160 Kbps, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats; MPEG-4 video up to 2.5 Mbps, 640 by 480 pixels, 30 frames per second, Simple Profile with AAC-LC audio up to 160 Kbps per channel, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats; Motion JPEG (M-JPEG) up to 35 Mbps, 1280 by 720 pixels, 30 frames per second, audio in ulaw, PCM stereo audio in .avi file format
EDIT 2: iPhone is actually more capable of playing back 1080p than the new ATV as the 4S has a dual-core A5 as opposed to the single-core A5 in the new ATV. On top of that the 4S supports High Profile level 4.1 where the ATV is only at 4.0. Normally I wouldn't mind as I obviously can't make use of all the 1080p pixels on the 4S but as stated already, I'd hate to have different versions of the same movie.