The James C. Penney Foundation was created in 1954 by the merchant, James Cash Penney, and his wife, Caroline A. Penney. James C. Penney was born on September 16, 1875 near Hamilton, Missouri. In the early 1900s he purchased his first store, called the Golden Rule. His values, emphasizing both the customer and the employee, helped him build a chain of Golden Rule stores that was renamed the J.C. Penney Company, Inc. in 1913. Penney's personal philanthropy began with death of his second wife, Mary. He formed the J.C. Penney Foundation in 1925 in her memory to help support youth programs and the Penney Farms, a retirement community founded by Penney for ministers. The J.C. Penney Foundation folded after the stock market crash in 1929, but Penney regained his personal fortune and renewed his interest in philanthropy over the next two decades. In 1954 he and his wife, Caroline, founded a second foundation, called the James C. Penney Foundation.

The James C. Penney Foundation began as a small, family foundation with five officers serving as the board of directors. The first officers (and directors) of the foundation were James C. and Caroline A. Penney; their daughters, Mary Francis Wagley and Carol Marie Guyer; and Penney's son from his first marriage, Roswell Kemper Penney. According to the articles of incorporation, the grants made by the foundation would be for religious, charitable, scientific, literacy, and educational purposes. Many grants were given in small amounts of less than $100 to churches and religious organizations, schools, and youth organizations. Exceptions to this included the Reorganized School District of Caldwell County in Hamilton, Missouri, the YWCA, and a handful of other organizations of particular interest to Penney or his wife that received larger grants of over $1,000. Penney served as president of the board of the foundation until his death in 1971.

In 1971 Caroline Penney became the president of the foundation and the foundation hired its first managing director, Joseph Freund, who had served as a director and treasurer of the foundation for several years. The gradual increase of financial and legal obligations through the foundation's investments along with the influx of new grants necessitated the hiring of a person devoted to managing the business affairs of the foundation. Throughout the 1970s the foundation increased the amounts given and focused on developing specific granting areas as the children of the founders assumed more control of the foundation's affairs.

In 1980 Caroline Penney stepped down as foundation president, turning over control to the second generation. Mary Francis Wagley became president of the foundation for a brief period followed by her sister, Carol Guyer, who would remain the president until the foundation closed in 1998. With the transition of foundation control to the next generation, the organization was restructured into more of a business operation. Joseph Freund retired as the Managing Director of the foundation and Anne Romascso was hired along with an office assistant to manage the daily operations of the foundation, compile and distribute dockets containing the upcoming grants to discuss at board meetings, and maintain communication with grantees.

The board members also sought to shift giving patterns and pursue new funding areas. The descendants of James C. and Caroline A. Penney maintained their parents' focus on youth and family while looking to the needs of the future. New grant areas included the environment, job readiness and training, management assistance to help with organizational development, peace projects, and domestic violence. The third generation also joined the board with the election of Cynthia Loraine Guyer and Anne Paxton Wagley.

Beginning in the 1990s the foundation began to reevaluate its giving. The board initiated several task forces to look at the funding priorities of the foundation and move toward the gradual shift of foundation governance to the third Penney generation, who now occupied several seats on the board. The foundation began forming collaborative funding efforts in order to maximize the benefits of its giving and grants focused in three primary areas: community building, strengthening youth and family, and environment/human habitat. Within these broad funding areas were immigrant rights, youth concerns, community programs in repressed areas, and clean environments. According to the 1998 Annual Report grant making of that decade emphasized empowering politically and economically disenfranchised people to take a more active role in the decision making processes affecting them and influencing public policy to promote a more just and equitable society.

By the late 1990s the foundation board had increased to include third and even fourth generation family members and was no longer a single-family foundation. The expansion of the family and the subsequent increase giving interests forced the foundation to look seriously at how it would be managed in the coming years. The board hired consultants to look at the role the foundation should play taking into consideration the opinions of family members, geographic interests, and national trends. In 1998 the foundation announced that it would restructure into two separate foundations dividing the endowment equally. The Partnership Foundation was created in Dallas, Texas by the family of Mary Francis Penney Wagley and the Penney Family Fund, based in the San Francisco Bay Area, was created by the family of Carol Marie Penney Guyer. Since the James C. Penney Foundation's initial restructuring in 1980 through its closing in 1998, it had awarded 820 grants totaling $9.6 million.