I have done this at other stores, but there is nothing stopping anybody from doing the following:

1. Explain to the Manager that you will escalate the issue to Costco's regional manager if an exception is not made for Dad and yourself;
2. If the manager continues to quote policy, pay for the new membership, pay for your purchases and ask for a membership refund at the desk.  Costco has a money-back policy AT ANY TIME during the membership period;
3. Find the name of the Regional Manager, email address and phone number.  Tell him/her about your Dad's veteran status, how long he was a Costco member and that exceptions to policy are normal.  Ask for a complimentary membership for one year for all your trouble;
4. Go to Costco's facebook/twitter page and post your experience.  Other members will sympathize.  Post the experience on YOUR pages as well.  When your friends return the membership, they will mention your story...guaranteed;
5. Wait for Costco to get back to you quickly.