Tom's sister has a son. What does Tom call him?
1. He calls him nephew.
2. He calls him "nephew."
3. He calls him "nephew".
(Which answer is right?)
Either 1 or 2 is correct. #3 is incorrect with the period after the quotation marks (unless you live in England!).
http://grammar.ccc.commnet.edu/grammar/marks/quotation.htm
Between 1 and 2, I'd say #1 is better.
Option 1, "He calls him nephew," is the correct answer.
In this case, Tom's sister's son would be Tom's nephew. Nephew is a commonly used term to refer to the son of one's sibling.