First off I see you are NEW to Wedding Bee, so a BIG Welcome Aboard !!
As for your situation… ya it is beyond tacky (downright RUDE)
The Rehearsal and any social that happens afterwards… Get-together, Cocktail Party, Dinner whatever… is meant to bring together the Members of both families (many for probably the first time). So it is meant for the Bride & Groom, Both sets of Parents, any Step Parents, GrandParents, God Parents, Brothers and Sisters of the Bride & Groom (and their Spouses), the Wedding Party and their SOs (Spouses, Fiances, Fiancees) and possibly any special Aunts & Uncles, or Out-of-Town Guests etc.
It is also a nice gesture for the Host to invite the Officiant of the Wedding and their Spouse, or anyone who is contributing to the Wedding Ceremony, who would be at the Rehearsal (Readers, Soloists, Musicians etc)
IT IS NOT AN OCCASION when the whole town should be invited… it is meant to be an intimate gathering of family etc.
Your Mother-In-Law is wrong… if she goes ahead with her plan, there will be hard feelings… as these folks won’t be going to the Wedding (which will the central topic of conversation naturally at this event the day before). This is almost a back-handed slap infact saying come to the Rehearsal Dinner, and hang out with us, but by the way don’t get too comfy here, because you aren’t invited (nah-nanna-nah-nah)
All that said, I do advise you to stay out of it.
This is one of those occasions when you need to speak with your Groom, it is his family, and his Mother, and he needs to set her right on what is proper etiquette for this situation (so she doesn’t come off looking foolish)
Here is the excerpt from the Peggy Post’s *Wedding Etiquette* on the subject, you might want to show it to your Fiance (copy it) so he has it to show his Mom.
Those invited to attend a rehearsal party should include the members of the wedding party (except for the flower girl and ring bearer), the officiant, parents and grandparents of the bride & groom, and siblings of the bride and groom if they are not in the wedding party. If the bride and/or groom have stepparents, they are invited with their spouses if they have remarried but should not be seated next to their former spouses. The wedding party’s husbands, wives, fiancees, fiances, and live-in companions should be invited, but dates are not included. The children of the bride & groom from a previous marriage also attend, unless they are too young. After that, it is optional that any number of people may attend, including out-of-town guests, close friends, aunts & uncles, and godparents. Junior bridesmaids and junior ushers may attend if the hour is not late, as may the flower girl and ring bearer (if supervised)
Hope this helps,