Distance does not affect who you can chat with at all. You could be 2 feet from each other, two houses from each other, two blocks, two miles, two states. You should be able to join the other's chat or party and talk.
If your friend just got a X360 then ask them if they have a GOLD Xbox Live membership. In silver memberships you cannot play together online. You both have to have a Gold. Although, either way you should have been able to join the other's chat.
Maybe he accidentally marked you as "Block All Communications." Or Vice Versa. The way to remove this is to have the person who blocked communications send a message to the other. That should effetively unblock the other friend.
It could be a general misunderstanding of how Xbox works. Again, your friend just got an Xbox. Maybe he doesn't know how to join parties or chats.
But one thing I know for certain: Distance is irrelevant. I play with my brother online, who is in another room in our house, my friend Jenner, who is a few miles away, my friend Josh, who is two blocks away, and King, who lives across the country, all at the same time in the same party on Halo 3, Xbox Live.