Pirated files are not necessarily identifiable as such, not in the digital world. If I download some albums from what.cd, you can't tell they're pirated, maybe I ripped them with the exact same version of LAME. What I'm trying to say is that today, having a pirated file isn't a property of the file, it's a property of how you got ahold of that file.
I don't understand what you mean when you say the service "legitimizes" (paraphrase) existing music. All it does is exchange one set of bits for another set of bits, and this set of bits or that set of bits don't make an audio file legitimate or illegitimate.
I mean it's a bit like transcoding, isn't it? Except instead of doing it yourself, you're paying Apple to do it. The fact that a third party is providing the service doesn't necessarily mean that the process as a whole is legit, in the same way that taking a PDF of a book to FedEx Kinko's to print doesn't make the copy legit, in the same way that buying a Windows upgrade to upgrade your old pirated Windows doesn't make the resulting license legit.
I realize we're in kind of a special circumstance here because Apple has paid the music labels a lot of money, but we're just speculating about what the contents of their license enables them to do, which is probably only to be indemnified in the event that people use the service with pirated music (but not to indemnify the actual users).
Or am I missing something?