Tonight I gained Diplomatic Sorcerers, two of the other 3 players were in decline so had no active race. A reading of the rules implied to us that the Diplomatic power could not be used against those two players as they had no active race.
We were wrong. Consulting the Day's of Wonder FAQ I learned:
Q: Is a race with the Diplomat power allowed to nominate a player, who has just declined or who has not yet had a turn (and therefore has no active race) as an ally?
A: Yes indeed, the only restriction in the choice of an ally is that you cannot choose a player if you just attacked his active race.
Years of playing MtG have made questions like this easier for me.
At the end of your turn, you may select one opponent whose Active race you did not attack this turn as your ally. You are now at peace with him and he cannot attack your Active race until your next turn. ...
Breaking this rule down:
At the end of your turn, select one opponent.
That opponent must not be someone whose Active race you attacked. (here is where you misread it. The rule isn't requiring that the opponent have an Active race, only that you did not attack their active race.)
That opponent may not attack you until your next turn (Ghouls specifically excluded by the rules edited above)