If the IRS intervenes and uses the Tie Breaker Rules then your daughter could get a sworn affidavit from her son saying that he started living with her in June or whichever month she moved out. If your daughter was providing the support for her daughter while living with her son, and paying him to stay there she would still be able to claim her daughter as a dependent. Assuming her daughter is a minor, the rule is that her child cannot provide more than half of her own support and to claim Head of Household, your daughter would need to provide more than half of the support for the household. A household does not necessarily mean all of the people in the house as people can have roommates that are not at all related tax wise and would not be considered in the calculation of the support of the household.
Since she lived with her mom the longest during the year, she is the one who would be the one to claim her.
If he claims her, whoever files second, their return will be rejected if they try to e-file. The second person will need to print and mail the return, then the IRS will use the Tie Breaker Rules to decide who gets to claim her.
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