Connect ground of system A to 1v6 of system B?
You do not want to use 1M resistors for the virtual GND divider. Use a much lower resistor value set. For a practical working scenario the resistors should be about 10 to 50 times lower impedance than load impedance that you place on the Headphone signal from the I-Pod.

If this lower impedance divider does not suit well with your battery supplied application then you should look into using a split voltage rail divider chip or create your own. To roll your own you can use an a resistor divider like you have now, place a cap across the lower divider resistor and then buffer the divider using an opamp that is wired up as a standard voltage follower. The output of the op-amp becomes your virtual head phone ground.