If this is more than just a rumor, it could mean trouble for Microsoft. I'm not lawyer, but I suspect that this practice may violate the GNU General Public License (GPL) under which Linux is licensed. Depending on how Microsoft is using the code, the company may be required to release some or all of the source code for Windows to avoid violating the provisions of the license. This could also be bad news for Microsoft if an ambitious lawyer smells cash and sniffs out the potential to sue Microsoft for violation of the GPL. Because Microsoft has lots of cash, such a suit would be tempting.
Even if no one would take that case, there is still one other reason this is bad news, especially for Windows users. If Windows is improving because its developers depend on the excellence of Linux source code, then one can only conclude that Windows will always be at least one step behind Linux in terms of innovation and quality.
Microsoft has squashed competition based on the fact that it has always been able to keep its competitors in the catch-up mode. But if Linux developers are the teachers, and Windows developers are the students, that gives Linnux not only the technical advantage but a public perception advantage as well.