How to Takeover a Folder when even Admins and SYSTEM has Access Denied

Group Policy should handle this without problems. Example I have for locking down the C: root folder on Windows 7:

Computer Configuration > Windows Settings > Security Settings > File System > %SystemDrive%\

• Permissions
  • Type: Allow, Name: BUILTIN\Administrators, Permission: Full Control, Apply to: This folder, subfolders and files
  • Type: Allow, Name: CREATOR OWNER, Permission: Full Control, Apply to: Subfolders and files only
  • Type: Allow, Name: NT AUTHORITY\SYSTEM, Permission: Full Control, Apply to: This folder, subfolders and files
  • Type: Allow, Name: BUILTIN\Users, Permission: Read and Execute, Apply to: This folder, subfolders and files
• Allow inheritable permissions from the parent to propagate to this object and all child objects: Disabled

This is from procmon running on the remote machine?

If so, that indicates that impersonation was successful (as it identifies the right domain\user, right?), so it's not a delegation problem with Windows authentication.

If not, it's probably a delegation problem with Windows authentication; try DelegConfig.

If the application is creating its own connection using \server\share - i.e. it's not a folder in IIS mapped to that location - then further subtleties may be present based on the application framework and the way it's been programmed.