as long as it doesnt cause a "conflict of interest" is what i was told when i toured...
like if you work in the tower at the airport you instruct at...and try to get special treatment or treat your school special when you are in the tower
the tower manager at IAH told me a story of a guy that would call in sick to instruct (wtf i cant think of any reason to do that) and one day they heard him on the radio doing an approach into IAH...he was counting on not having to ever talk on the radio but his student made a mistake or something
i don't see why it's really any of the FAA's business. i've heard the FAA frowns upon being a CFI at an airport that you work in the tower for. conflict of interest or something. i've never seen that in writing though.
Irishcarbomb is spot on, if you instruct at a airport where you are a
controller and someone finds out and reports you to your regional
office, expect a letter from the FAA General Counsel advising you
to cease and desist. They will almost always warn you once before
taking any action.
It's less of a problem when you work in the Center or a TRACON.
I got a Cease and Desist letter over a website SoCalTRACON.com,
the letter from the General Counsel office was polite but firm, "stop
now or face further punitive and/or legal action."
It's not worth the money you'd spend in legal fees fighting it. Find
a nearby airport and instruct there, no one will bother you then.
Oh and calling in sick to instruct, yeah that's a big "WTF - Over".