This answer is predicated on the assumption that your son was a minor three years ago when you confiscated his iPod Touch. If that is not the case, and he was an adult, then it comes down to your contractual (verbal?) agreement about the terms of him continuing to live in your house as an adult. If you had no agreement, then such confiscation was likely not appropriate and he had every right to take it back (except that violating your private space to take it was probably not okay, though it's debatable).
Also, I firmly believe that allowing children to possess items and enjoy the fruits of their labor is generally good for them. In fact, it's probably good for them to receive a salary and be required to buy items that they need or want—shoes, snacks, certain kinds of entertainment, soap, clothes maybe at the right age, perhaps lunch at school, and so on. This way, when the child inevitably is foolish with the money, he gets to enjoy the consequences—but the parents are there to provide a safety net so that these consequences do no real lasting harm. So read this answer with the knowledge that denying one's child access to personal possessions should be rare or should only occur in special situations that truly demand it.
First, What the Law Has to Say About It
Common law (in the US, at least) recognizes the right of minors to own property that is gifted specifically to them, and accordingly denies parents the right to appropriate a child's possessions except in a custodial fashion, to reserve such possessions for future use. The law does recognize the right of parents to prevent a child from spending his money, the right to take items away from the child to save them for the future or that are illegal for the child to own (e.g., a car), and that the parents retain rights to items they give their children that are common necessities such as clothes and shoes.
However, in my research I didn't see anything about the ability to prevent your child from receiving a gift in the first place. I could see a parent weighing carefully the potential misuse of a gift to their child and politely informing the giver that the gift needs to be given to the parent, who will provide access to the gift's use to the child as he sees fit, or the gift will be refused. This is an open question.
Disagreeing With Other Answers
Many other answers state that the device belonged to your son simply because he paid for half of it and it was understood by all that it belonged to him. I am answering just to resist this notion and say that that is not automatically true. I don't agree that minors living in their parents' house automatically and irrevocably own the fruits of their labors.
Consider: the only reason that a minor child living in his parents' house has any free money to spend, even if that child is holding down a job, is because his parents provide everything: housing, food, clothing, electricity, gas, water, garbage service, and so on. In a poor family where the parents cannot provide all these things, any income a child makes while living in the house would belong to the family first, and then only accrue to the child with the permission of the parents. The parents have every right to take every last dollar the child earns and pay the electric bill or buy groceries to feed everyone. It is only because you are rich that your child has any of his "own" money.
If anyone disagrees with this, consider the situation where your minor child earns his "own" money, then with that money purchases (or is simply given) any item you consider physically dangerous: a gun, poison, drugs, a chainsaw, or anything that you consider to be wholly inappropriate for him to possess or control. You'd take that thing away in a heartbeat, without any concern for the monetary value of it or who bought it or who has a "right" to it. As the parents, you have the right to it. You have the right to control your children's possessions while they are un-emancipated minors who live in your own home. You should not exercise this right without good reason, and in general it is best for children to be able to possess items and enjoy the fruits of their labors—it would generally be harmful to deny them these privileges and experiences unless there was great need or an overriding moral objection.
One way I have looked at it with my own child is that his things are, for now, "reserved indefinitely for his exclusive use." In this way, he understands that I have placed him as the caretaker of his things and I have no specific plans to revoke this at any time in the future; yet I do reserve the right to reallocate those things differently some day. For example, I would not consider it appropriate for him to burn all his possessions, as he would likely regret this down the road, plus we his parents have important life lessons in mind beyond mere possession, such as being good a steward of one's resources. Allowing him to destroy his things, while potentially strategically allowable for a life lesson, is probably not the (normal) best course of action.
Parents are not just guardians of a child's physical safety, but also his emotional, mental, and spiritual well-being. So any item that consists of a danger in these ways, even if not presenting physical danger, is also a candidate for confiscating.
And finally, if you originally and publicly allowed your son to possess something that later became dangerous (or you realized the danger of), you'd still be right in taking it away.
Even if the iPod Touch was purchased wholly by your child's "own" money, if your child was a minor at the time you confiscated it, and you did it soberly with carefully thought-out reasons that justifiably override your normal pattern of allowing him to control his own possessions, then it was not his to take back, and he did in fact steal it.
So, all the people telling you that you made a mistake or did something wrong, are, well, wrong.
Assuming that your child is an adult now, you are in a problematic situation–you don't have the authority any longer to tell him what to do, and your role has wholly changed away from discipline and direct teaching to the more indirect ones of giving advice, support, and being a safety net. (Hopefully, you were already transitioning into this role as your child matured, exhibited responsibility & independence, and gained trust—if not, then he's probably going to have a really hard time for a few years while he tries to figure adult life out with no prior practice.)
This means that you have to consider your goals and the likely effectiveness of any action you take to achieve those goals. If you approach this as a simple property-theft situation, and (say) call the police, you may get the item back, but you most likely won't be able to keep or maintain an ongoing relationship with him. Without this relationship, how can you ever expect to be a positive influence, or be a source of advice & support, and function as a safety net?
Additionally, at this point, you cannot control what media he views, and if he (presumably) has a job and is supporting himself and paying for his own housing, he soon will be able to purchase a new iPod Touch or other devices on which he can access media of his choosing, so taking the item back is a lost cause in terms of protecting him.
So I would recommend that you speak to him and attempt to open a communication channel that will foster the kind of relationship you want to have with him in the future. You might say something like this:
"Son, we were disappointed to find that you had taken the iPod Touch from your mother's desk. You lost that device because you misused it, and it wasn't yours to take back. We'd appreciate it if you did return it, and then we can negotiate on an above-board basis whether it does go back to you after that. However, if you choose not to return it, please know that we still want to be part of your life and want to love and support you as much as we can. Life is hard enough without letting a little thing like this break relationships within our family."
If he still refuses to return it, I would voluntarily offer to him that you've let the issue go and you forgive him, though the situation could have an effect in your calculations of the wisest way to allocate your resources in the future.
I would not try to take the item yourself, nor search his new residence, or anything like that. Only receive the item if he voluntarily hands it over. You are his parents, not strangers who care more about the property than about his ultimate well-being.
If he protests that it was his and he had a right to take it, I wouldn't argue or go into much explanation about it, other than a very brief "we believe that parents have a right, and a duty when acting in their child's best interest, to control that child's earning, spending, and to decide what possessions their child is allowed to own. When we took it away, it was no longer yours." Then don't discuss it further—just stick with the reassurances that you want to maintain relationship with him and support him in any way you can.
You still have to decide what "support" does mean. If you believe that your son is engaging in actions that are harmful to him, you may elect to avoid giving any financial support so long as that is happening. It depends on his need and the situation—there's no simple rule you can follow. But, money is fungible, and the more money you pay toward his rent or basic necessities, the more money he'll have to put toward entertainment or pursuits that you consider inappropriate.
It's definitely hard to strike the balance of being firm, yet gracious, that remains connected to your child and supports him, but doesn't enable him in dysfunction. I wish you the best in your future relationship with him and all your children.
Final Thoughts About The Law
In your particular case, if the item was considered a gift, you may have had the legal right to take it from him at the time, but only in a custodial fashion, meaning that once he became an adult you had to relinquish his possession to him. Parents would be wise to consider the law in this case when deciding whether it is appropriate for their child to be given certain kinds of gifts. Further consultation with a lawyer would be wise in order to act wisely in the face of a large or potentially harmful gift which the giver will not relent in determination to give.