I am also getting the same problem. When I create a new directory with a DirectorySecurity object applied, the permissions are set correctly. However, when I use SetAccessControl with the same DirectorySecurity object. The parent folders users are copied in and the "Inherit permissions from parent folder" checkbox is checked. IS this a true bug or are my methods incorrect??? Have you resolved the issue since the last post. See below for my code:

private static DirectorySecurity CreateDirectorySecurity(string[] UserNames)
{
try
{
// Get a DirectorySecurity object that represents the current security settings
DirectorySecurity ds = new DirectorySecurity();

foreach (string UserName in UserNames)
{
// Add the FileSystemAccessRule to the security settings
ds.AddAccessRule(new FileSystemAccessRule(UserName,
FileSystemRights.FullControl,
InheritanceFlags.ContainerInherit | InheritanceFlags.ObjectInherit,
PropagationFlags.None,
AccessControlType.Allow));
}

return ds;
}
catch (Exception ex)
{
Utility.LogException(ex);

return null;
}