When I use InPlaceEditor (1.5.0_pre0) to edit this div:
<div title="Click to edit" class="in_place_editor_field" id="document_version_body_1_in_place_editor" style="border: 5px solid rgb(204, 204, 204); background-color: transparent; background-image: none;">
<p> para </p>
</div>
The paragraph tags are stripped before the text is presented in the textarea. Note that there is no problem entering paragraph tags in the textarea -- they are handled just fine and added to the DOM just fine. It's when I go back to edit them that they get elided. All tags seem to get "sanitized" out this way before editing so e.g. <em> tags are elided too.