Okay, there is one sure way to get rid of it, and in time for christmas: Reformat. If the viruses are that invasive, reformat is the easiest and surest way to get rid of them, and you can have it done in a day, easy. I suggest looking online for a step-by-step and printing it out (using a friends computer, if necessary), and following them. It should be a farely simple process. Just remember to back up any and all data you need before you reformat, as it will be lost in the process.
You should not use itunes for setting up the IPod. I do not know if there are any widely occurring viruses that can transfer through an IPod, but I do not doubt that it’s possible, and since IPods are so prolific, I’d be surprised if at least a few big ones won’t be able to. At the very least, IPods also act as portable hard drives, and PHDs can get infected very, very easily.
Lastly, to your comment “I know Macs can’t get PC viruses”. This isn’t entirely true. Less true if the family member has a PC, as the IPod OS doesn’t matter at all, it’s just a transfer mechanism. Even if they do have a Mac, it’s possible to get infected with a PC virus. It’s just that since Macs have such a low market share, it wouldn’t be worth a hacker’s time to write the code to have it do that, so it would be incredibly rare. Same reason Linux systems almost never get hit. They’re just not viable targets.