Not sure if this was intentional, or the code was accidentally removed?
Intentional. In fact the code you show has never existed. There is however this code:
<!– This is an image not a text, so don't use text padding
Reset also the last height after all the images has been printed
set pagecheck to 0, the image function check is too
and "trick" the X-position back to the margin with a newline –>
<textbox left="$pwidth" newline="1" pagecheck="0" padding="0" reseth="1" width="80">
<image file="@FILE" width="80" ln="N"></image>
The photos option was only ever intended to display the images attached to the FAM record, not the individuals, as far as I can tell. I assume that logic was becasue it is a Family report. There is another version for Individuals (now Resources > Individual report).
However, Jamie is right. I will not be looking at any changes or bug fixes for these ancient and ugly (IMHO) reports. Their replacements are well underway. Many already done in 3.2.3, currently under the Resources menu item. The rest will be done for 3.2.4 (only two left as at today). At that time the Reports menu as it is now will disappear and Resources will be renamed to be Reports.