I had this problem but discovered I was using the wrong parameter.
I set an attribute called Members.RenewalLetter and then set Members.RenewalLetter=UserDefDoc.UDD_Template (which holds the uploaded document.
THIS DID NOT WORK and produced the result you described. No conversion took place - you jusst get a document with the tags in
When I set Members.RenewalLetter=UserDefDoc.UDD_Name followed by
CREATE BulkText WITH BulkText.Attachment1=Members.RenewalLetter (in my case I was sending the letter as an attachment) IT ALL WORKED FINE
It was strange because UDD_Name is just a plain text attribute and I suspect that Members.RenewalLetter=UserDefDoc would have worked.
The document was put in context with a preceding line FIND UserDefDoc WHERE UserDefDoc.UDD_Name='Renewal Letter'
I allow individual letters to be sent to members by using a form process - CREATE DOCUMENT with the "Let users choose document" radio button clicked. AwareIM seems to take care of everything using this method
Hope this helps