In the wall, I found what appears to be a functioning, extra return duct (6 x 18, extending from the wall of our basement and reaching up underneath the floor of the bathroom on the second floor, only stopping short of the second floor bathroom floor by a half of foot or so). The bottom of the duct returns to our big return trunk in the basement (right before the A/C unit) through a cinderblock wall and the top cuts off without any kind of capper and obviously it doesn't extend through the bathroom or family room wall, it is just there sucking in non-living space air for the last 50 years.

First question, what should be done with this?
I assume I should cap it off as low as possible since I cannot remove it from the cinderblock basement wall without leaving a hole. My HVAC contractor who replaced our AC last year said he can cap it with sheet metal for 130 bucks, seems kind of steep.

Second question, is there any purpose to this duct? I assume sucking in non-heated or non-AC air only makes the HVAC system work harder to maintain the appropriate air temp in the living areas since this area is not all insulated.

Third question, should I insulate this space while I have it open?

This is a few foot thick empty space between the back wall of my kitchen and family room, the top side of the back wall of my laundry side of an unfinished basement (split level house) and bottom area under my newly busted up bathroom on the second floor. The 50 year old tile was all ripped up due to the leak so for the time being I can look through the subfloor upstairs into this space and into a foot or so of my family room via the broken wall down there.

Any recommendations are welcome.

I'd just cap it with sheet metal as the contractor suggests. That's a typical reasonable fee for a specific housecall. But you can do it yourself for a fraction of that price if you can find a sheet metal supplier with that standard size; otherwise you'll have to have it made up.