On March 23, 1996, Wallace was arrested outside a Manhattan nightclub for chasing and threatening to kill two fans seeking autographs, smashing the windows of their taxicab, and punching one of them. He pleaded guilty to second-degree harassment and was sentenced to 100 hours of community service. In mid-1996, he was arrested at his home in Teaneck, New Jersey, for drug and weapons possession charges.
In June 1996, Shakur released "Hit 'Em Up", a diss track in which he claimed to have had sex with Faith Evans, who was estranged from Wallace at the time, and that Wallace had copied his style and image. Wallace referenced the first claim on Jay-Z's "Brooklyn's Finest", in which he raps: "If Faye have twins, she'd probably have two 'Pacs. Get it? 2Pac's?" However, he did not directly respond to the track, stating in a 1997 radio interview that it was "not [his] style" to respond.
Shakur was shot multiple times in a drive-by shooting in Las Vegas on September 7, 1996, and died six days later. Rumors of Wallace's involvement with Shakur's murder spread. In a 2002 Los Angeles Times series titled "Who Killed Tupac Shakur?", based on police reports and multiple sources, Chuck Philips reported that the shooting was carried out by a Compton gang, the Southside Crips, to avenge a beating by Shakur hours earlier, and that Wallace had paid for the gun. Los Angeles Times editor Mark Duvoisin wrote that "Philips' story has withstood all challenges to its accuracy, ... [and] remains the definitive account of the Shakur slaying." Wallace's family denied the report, producing documents purporting to show that he was in New York and New Jersey at the time. However, The New York Times called the documents inconclusive, stating:
On October 29, 1996, Evans gave birth to Wallace's son, Christopher "C.J." Wallace Jr. The following month, Junior M.A.F.I.A. member Lil' Kim released her debut album, Hard Core, under Wallace's direction while the two were having a "love affair". Lil' Kim recalled being Wallace's "biggest fan" and "his pride and joy". In a 2012 interview, Lil' Kim said Wallace had prevented her from making a remix of the Jodeci single "Love U 4 Life" by locking her in a room. According to her, Wallace said that she was not "gonna go do no song with them," likely because of the group's affiliation with Tupac and Death Row Records.
In 1996, Wallace started putting together a hip hop supergroup, the Commission, which consisted himself, Jay-Z, Lil' Cease, Combs, and Charli Baltimore. The Commission was mentioned by Wallace in the lyrics of "What's Beef" on Life After Death and "Victory" from No Way Out, but a Commission album was never completed. A track on Duets: The Final Chapter, "Whatchu Want (The Commission)", featuring Jay-Z, was based on the group.