When is it appropriate to use the KnownType attribute?

The KnownType attribute is necessary when you are serializing non-concrete types such as interfaces or base classes. The WCF serializer must know about all possible implementations of the interface or inherited class. Any implementations that it doesn't know about will cause a serialization exception.

One possable usage can be found in this SO question

[KnownType] is needed to tell it about subtypes. The disadvantage of not using it is that the following won't work:

[DataContract]
class Foo {}

[DataContract]
class Bar : Foo {}

with a method on the WCF interface that returns:

public Foo GetFoo() { return new Bar(); }

Without the attribute, the serializer (especially for mex/proxy-generated types) won't know about Bar, and it will fail. With the attribute:

[DataContract, KnownType(typeof(Bar))]
class Foo {}

it will work. This only applies to DataContractSerializer - with NetDataContractSerializer you get the type data in a different way.