The question is who does the copyright belong to in this repository. It is both original author and Microsoft (because they took authors code and modified it). So the License file should mention both.
When you depend on a third-party, you don't add their copyright in your main LICENSE file.
In this case the code is essentially forked, integrated and intermingled, so that is why it should be in the LICENSE file.
If it was file or two, it would be fine to add a comment pointing to the license file in the repo, if it was a directory, or to copy it verbatim to that file. It all the copied code was in a directory then having it in directory would be fine.
In this case it looks like they took the original code and heavily modified it, so the simplest way to solve it is one LICENSE with both notices.
I don't think that the licence asks to do anything like that. Where in the MIT licence do you see that?