For anyone not familiar with these groups, here's a (slightly dated) overview by state.
www.ecs.org/clearinghouse/61/13/6113.htm
What state are you in and are you currently a 501(c)(3)?
In Texas, our groups are called CAACs (Campus Academic Advisory Committee). Like many states, this group is mandated by state law and has very specific responsibilities. But it's much more of a strategic and advisory role that the the typical parent group which is a more operational group typically focusing on the year in progress.
I'd have a hard time seeing the two merged. It's difficult to imagine how it would work, but maybe your state operates differently.
I think your first step might be researching exactly what your state laws define the site council to be and what it can/can't do. Surely your prinicipal knows if there are any limitations, but I'd check it out for myself. You may find a very simple show stopper. For instance, in our state the group must be comprised of a specific mix of community members, teachers, and parents. I'd think those percentages would be hard to replicate if it were a combined Site Council/PTO because your percentage of parents would be too high. Then again, maybe you wouldn't have "members" like you do for a PTO.
But in essence, if he does this, he's abolishing the PTO as an independent group and reforming it as a school committee. So any funds raised would indeed be the school's. To be successful, I'd think the PTO would still have to meet separately, have subcommittees, etc. I don't see how you could combine the agendas of two such different groups. So I'm not clear what he hopes to accomplish.