Are you sure that what you see from the bottom is not a well corroded wedge stuck in place? You can stick a magnet up inside to see if the thing in the steerer is steel, or not. If it's steel it's likely the wedge. I have seen wedges that are so badly "rusted' that their threaded bolt hole is pretty stripped out. Wasn't there a bolt with an allen head inside the top of the stem? If not then the bolt was likely removed before, but since the stem was corroded in place the bolt no longer did any function.

You could try ATF or Kroll as they have a greater penetrating capibility then WD-40. You might also try some moderate impact force from either end to help shock things loose. You should consider the stem a loss anyways.

The stem goes inside the steerer, given the threaded steerer and headset design. Andy.