After the railway dispute ended, Thompson returned to Austin, where he opened the Iron Front Saloon. One of his competitors was the Capital Theater, owned and operated by Mark Wilson. On Christmas Eve 1876, Thompson and friends were at the Capital Theater drinking when a fight erupted involving other patrons. When Thompson tried to intervene, Wilson produced a shotgun and fired at Thompson but missed. Thompson then killed Wilson. A bartender, Charley Matthews, fired a Winchester rifle and grazed Thompson's hip. Thompson returned fire, hitting Matthews. Though seriously wounded, Matthews survived. Thompson was not arrested, as the shooting was ruled self defense.