You are correct - the paragraphs tool does not work with nested elements. This is done for a reason - the main purpose of this tool is to set headings. This means that you cannot have nested elements, because this would interfere with the headings - for example if you have <h3>text</h3> and you want to use the format block tool to change it to H4. If the format block tool did not strip the old tag (h3), then the result will not be correct (<h4><h3>text</h3></h4>).
If you want to create content in nested tags, then you need to use another approach. For example, you can use the InsertSnippet tool and create a snippet with your code. Here is an example that you can put in the editor's tools file:
<snippet name="subsection snippet">
<p class="next">Paragraph next</p>
This way your users can insert the snippet and then just enter text at the appropriate locations.
Another approach would be to create a custom tool that will wrap the current selection in a <div class="subsection"> tag. The current version of the MOSS editor does not allow you to do this, but we will be releasing an updated build soon, which will allow custom tools. For more information about the editor custom tools you can check out the editor online examples or the documentation (http://www.telerik.com/help/aspnet/editor/?AddingYourOwnButtons.html
the Telerik team