Should I be worried about plugging it in? (Could malware transfer onto my machine?)
You probably don't need to worry, but there's no real harm to being careful either. You don't say which operating system you are running, so it's hard to say much about what risks you might expose yourself to, but given that your system doesn't have autorun enabled, odds are reasonably low that any software-based malware would be able to transfer to your system.
If you have reason to believe that either you or your friend has been directly targetted by an active, relatively sophisticated adversary, then you should worry about things like BadUSB. In that case, however, you would probably know, or at least be able to suspect, that you are.
Is there a way to safely connect a USB device and sandbox it so it doesn't auto-run anything?
You could download a live Linux distribution such as Tails, Knoppix, Ubuntu or some other alternative. Burn that to a CD or DVD, or copy it to a USB stick (the CD or DVD in this case has the advantage of being truly read only), boot from that (and make sure your computer's hard disk is not mounted, and unmount it if necessary; Tails might be best in this regard), and use it to wipe the iPod.
Again, unless you are worried about direct targetting by active, relatively sophisticated, adversaries, that should be good enough. If you are extra paranoid, open your computer and disconnect the data cable going to the hard drive, but I'd say that even with reasonable suspicion of malware, for 99.99% or more of users, doing so is overkill; simply making sure the file system on the hard drive is not directly accessible will almost certainly be good enough.
I don't trust torrented files.
As long as they are limited to music files, and you don't attempt to play them, the probability of a compromise through that vector seems very small. Also, malicious music files would probably need to target bugs in specific player software, which points toward plain computer hygiene being a good defense: Keep good backups, and stay on top of software updates.