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I'm sure someone will give you more feedback on your question. I'm not sure what you mean by running linux on a terminal system. If you mean it exactly as said, the answer is yes. I installed Linux and hardly ever use a Xwindows except doing some demos for students. All the applications that are installed were installed from a terminal. Most of the time my Linux box doesn't have a monitor or keyboard attached. I login from remote terminals.
Also there was a time when I used to have a number of dumb terminals attached, of which I used to use to teach, and ofcourse to maintain the system.
I don't use dumb terminals at this time, because PC's are so inexpensive and have somewhat more features such as copy and paste buffers, saving buffers, automated logins, and web access.
Hope this helps.
-- L. James
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