While it is true that you can do what you want, the flag is more than fabric and thread, it is a symbol to many. There are rules for it's use. The are listed here:
http://www.ushistory.org/betsy/flagcode.htm
One of them states that the flag should not be used as bedding. If you believe that the flag is only fabric and thread, you can do anything you want with it, including burning it in protest. If you believe it is more than that, that it is a symbol, then the guidelines are there for you.
Perhaps the firefighter who has the flag quilt on the wall feels that is is more than bedding and should only be displayed, as regulations state. If you would like your quilt to be used, perhaps you can incorporate the colors and stars without it being a true replica. That would be much more respectful.