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What is the little diaphragm for on back of a turbo 350 transmission?

That little diaphragm you're referring to on the back of a Turbo 350 transmission is part of the vacuum modulator.

The vacuum modulator controls the shift pressure inside the transmission. It uses engine vacuum to adjust the firmness and timing of shifts based on throttle position and engine load. The diaphragm inside senses the engine vacuum and mechanically alters the transmission's hydraulic pressure accordingly. A higher vacuum (lighter throttle) results in softer, earlier shifts, while lower vacuum (hard acceleration) results in firmer, later shifts.