Yes I do know, basically, how a torque converter/transmission works but, to clarify, if it is a 1500 stall and your idling at 500 then when you engage there should be no transfer of power yet to the rear axle I would think, at least not to with such a hard slam....
Let me rephrase, is it normal with a shift kit like this to have this loud bang when putting it into gear?
I think TimoFinn explained it best by indicating line pressure is too high at gear engagement. That would then also explain why low fluid would not have as high a line pressure. At least that's what makes sense to me.
This weekend I'm going to replace the rear main seal on the tranny - leaking a bit. Replace the governor and valve and drop the pan and verify the dipstick. Then, once I get the correct markings on the dipstick I will ensure it is filled to the correct amount.
If, after that, it still slams so hard into gear then I will replace the torque converter with a 2500 and see where I'm at. If that still doesn't do it then I will take it to a qualified shop to see what they can do.
Thanks for all your continued help people.