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[#1]

The following diagnostic is generating:

A qualifying surviving spouse must have a dependent who lived at home where the relationship is child, stepchild, adopted child, daughter or son. If the qualifying child isn't claimed as a dependent, enter a dependent type of "Head of household or qualifying surviving spouse only, not a dependent".

[BobKamman]

As the IRS link you posted says, taxpayer  must "Have a child, stepchild, or adopted child who qualifies as your dependent for the year."  

For other purposes, a grandchild can be a "Qualifying Child." But not this one.