But this process only applies to children permanently residing in the U.S. If the child is under 18, was born outside the United States, but lives abroad in the physical and legal custody of a U.S. citizen parent or U.S. citizen grandparent, the parent or grandparent must apply for naturalization of the child. In addition, more criteria must be met.
The U.S. citizen parent or grandparent must have been physically present in the U.S. for five years before the child's birth, at least two of which were after age fourteen. Further, the child must be temporarily present in the U.S. for the naturalization process and to recite the oath of allegiance. Of course, if the child is too young to understand the oath, this requirement may be waived.
http://www.legalzoom.com/marriage-divorce-family-law/family-law-basics/is-your-child-us
I don't know if this is the case here, but it may well be that his parents had not met the condition of living in the US for the amount of time required. As usual, I would like more info. On the other hand, it seems that he would qualify since he served our country.
The child of 2 U. S. citizens would be a citizen regardless of where he was born. You quote a current law, but I am going from what I was taught at the Federal law Enforcement Training Center at Glynco GA during the Immigration portion of my training at the US Customs Academy in 1985. The course was taught by our Chief Counsel lawyers. They can’t apply a new law that would deprive him of his rights, when it wasn’t passed until many years after he was here.
He is a U. S. Citizen.